From a monetary perspective, investing in real estate is very similar to investing in the stock market. If you plan to profit in your real estate investments, you must have a good idea about the value of the property you purchase. Having this information allows you to make an educated guess about how much profit you can generate from the investment. In fact, you may plan to make profits through appreciation in property values, rental income or a combination of both. Real estate valuation is calculated through two methodologies such as absolute value and relative value. This article provides information on commercial real estate absolute value vs. relative value.
Absolute value is the value of the property itself based on its future cash flow potential. On the other hand, the relative value is the value of the property relative to other comparable properties. As you can imagine, there are several complicated mathematical equations to arrive at this value. The ability to calculate profitability is critical to any transaction, especially in commercial real estate. Get this value wrong and you are headed for disaster though you may think you’re entering a good deal. Even if you do not plan to buy or sell but just to reposition your property, proper valuation is still an essential component of developing an effective strategy to proceed with the deal. Getting this assessment right is important to save you from catastrophe.
Realtors use a simple method to determine whether the absolute value or relative value should be applied to a particular property. In an area where all the homes are quite similar in most attributes and are easily comparable, the relative value applies to the property. On the other hand, if it is difficult to compare the property with other properties in the area and the property is more of a contrast to those around it, the absolute value applies to such property. Where there is a unique setting within a great style of architecture or there is some other outstanding feature that sets the property apart from the rest, the absolute value prevails. It is a property that the buyer must have regardless of the price. In fact, the price may not be a consideration at all. That is where the absolute value applies to property.
The relative value of property is critical to a real estate buyer for comparison shopping. The relative value may often be lower compared to the absolute value of the property. Hence, the relative value is a good indicator of a great purchase. Although real estate valuation calculation seems fairly straightforward, determining the value of an income-generating property is quite complicated. But it is essential to make an informed investment decision when buying real estate.
In conclsuion, you need to have a good idea about the value of property to make the correct investment decision. This is where the absolute value and relative value of property come in handy. The aforementioned article provides informaion on commercial real estate absolute value vs. relative value.