bEveryone will experience the purchase of Real Estate Property at some point, whether it is for investment or for personal use. In addition, the dream of most people is to own a house or an apartment. This time, what is the estimated value of the real estate property you are investing in? I would like to share a simple calculation method that can determine whether the purchase price is really worth it.
This calculation method is called the Income Approach based on the net income of a real estate. There are other value-added methods, but this one based on income is the closest and most accurate. For example, other value-added methods can be calculated using cost-based approaches and market-based approaches. The cost-based approach is to find out how much it costs to build a house, how much does the land cost? The total cost is calculated to be the current value.
However, depending on the situation and time, costs may fluctuate and real estate prices may fluctuate, making it impossible to get a close estimate. For example, if PAE can be built for 25,000 kyats per 1 sf, the cost of an 18-by-40-foot one-story building would be around 180 lakhs. However, the market price depends on the condition of the land. Road Transport Neighborhood Future prospects Crowds; Demand There will still be a small amount of value due to factors such as.
Another market-based approach is simple. It’s a way to find out how many other similar homes are being sold in the same neighborhood on the same street and estimate how much the house you are buying could be worth. This method is also easy to calculate, but other houses are sold at a discounted price. For some other reason, the price was not right. It is possible that someone who can afford it buys it for a higher price for some reason.
The Income Based Approach I want to share now will be able to calculate the value of a Real Estate Property more accurately than the above methods. This method is based on how much the rental income is when you lease the real estate property.
The calculation formula is:
Value = Income / Cap Rate
Yes. Value (V) is the value of the property and Income (I) is the net profit minus expenses. Cap Rate (Capitalization rate) is the rate at which the investor expects the rate of return from this real estate property.
For example, let’s say you buy and invest in a large shopping center with a square footprint of 50,000 square feet (sf). Suppose this shopping center rents a full room and earns a net profit of 32 USD per year per 1 sf. In addition, if the investor expects an 8% annual return on investment….
Value = Income / Cap Rate
Value = (50000 x 32) / 0.08 = 20,000,000 USD
Will be calculated. In other words, the mall can be estimated to be worth $ 20 million and you can estimate how much the offer price is worth.
Income:
The Income (I) of the formula V = I / R takes into account the amount of annual or monthly income, which must be net profit. In other words, it needs to be an income that minus repairs and maintenance costs.
For example, suppose the shopping center above is 1sf / 32USD / year, but 25% of that revenue will be maintenance costs. In other words, the building is getting old and you have to pay about 25% of your regular repairs. So this is what will happen.
Value = Income / Cap Rate
Value = (50000 x (32×0.75)) / 0.08 = 15,000,000 USD
It will be This means that the shopping center can be estimated to be worth only $ 15 million.
Capitalization Rate (Cap Rate)
Cap Rate is the amount of return on investment when the purchase of a real estate property in the Commercial Real Estate field is the percentage of the investor expecting the rental income to be the same. In the above V = I / R formula, the percentage is calculated as a number, and the income for one year is calculated as the annual capability rate. If the income is monthly, you need to add the same cap rate per month.
Cap Caps can be obtained from research published by local real estate organizations. The CBRE 1H19 North America Cap Rate Survey, for example, found that the average cap rate for urban residential properties was 5.20% – 5.49%. (You can see in the picture below).
In Myanmar, the cap rate has no survey data and is expected only by the investor, so it is necessary to anticipate a possible rate. For example, let’s say you rent a six-story apartment in Yangon for 120,000 kyats a month. As above:
Value = Income / Cap Rate
Cap Rate = Income / Value = 120000/20000000 = 0.6% per month = 7.2% per year. If an investor buys a similar six-storey apartment in that township, the cap rate can be set at 7% or 8%, which can calculate the value and consider the offer price.
This calculation can cause the value to change as the rent increases. In the Cost Based Approach, the road was smooth, crowded, Although external factors cannot be taken into account, rents are a good thing because of these factors.
In terms of bank interest rates:
If you put your money in the bank, you will now earn 6% per annum of Saving Bank interest. So, if you can not get a bank interest rate, you can say that the investment is not suitable, so at least the cap rate can be calculated with the bank interest rate.
For example, let’s calculate how much a six-story apartment with a monthly rent of 120,000 kyats and a monthly salary of 1,440,000 kyats is worth at a cap rate of 6%.
Value = Income / Cap Rate = 1440000 / 0.06 = 2400000000 (240 Lakh Kyats). In this case, an apartment with a monthly rent of 120,000 kyats is worth 240 lakhs at a cap rate of 6%. In addition, 6% is the minimum amount as it is the bank interest rate. If the interest rate is lower than the bank interest rate, it is better to invest in the bank instead of risk investing.
Therefore, we can know from this calculation that we get 240 lakhs at least 6%, so at present, an apartment with a monthly rent of 120,000 should be a maximum of 240 lakhs.
The calculation is:
In fact, buying an apartment or house from a bank is more risky than putting it in a bank. The higher the risk when making an investment, the higher the return on investment for that risk. In other words, the cost of risk. So if you add 6% to the bank interest rate and 2% for the risk and calculate the cap rate at 8%, you will get an apartment with a monthly rent of 120,000 kyats, which is worth 180 lakh kyats.
This means that in Myanmar, it is appropriate to calculate the cap rate at 7% – 8%. If the asking price for the sale price is too different from the calculated price, it can be roughly assumed that it is more than the normal price. However, it should be noted that this rate is a value with no modifications or value added.
Other Notes:
Since this is an income approach, many other factors have been taken into account in addition to cost. For example, if you have an apartment with interior decoration, you can get more rent. For this, the formula will have more value than a regular flat without any repairs. This is also true in practice. For example, a six-storey apartment costs 20 million kyats without any repairs, but it has tiled ceilings and air-conditioners. If the repairs are made, it will cost more than 20 million kyats.
Also, in some places it is advisable to rent only land. Depending on the available rent, the above formula can also be used to determine whether it is more suitable for rent after construction on the land.
Weaknesses:
In a country like the United States, a cap rate of around 6% would be quite reasonable if you did not buy with a bank loan. This is because inflation is only 1% – 2%, leaving a net of 4%.
In Myanmar, the normal inflation rate is around 10% per year, so a cap rate of 8% is not really appropriate. In other words, it is as low as it can prevent inflation. However, at the current rate of 6% per annum, it can be said that it is better than the bank rate.
The higher the inflation rate, the less likely it is to match the cap rate of return, but on the plus side, the higher the inflation rate, the higher the original value of an asset. If the inflation rate rises by 10%, assets usually increase by at least 10% to 15%. For this reason, the capital gain value of assets can increase rapidly. For example, an apartment bought for 180 lakhs will have a inflation rate of 10% next year, and the market price will be between 190 lakhs and 200 lakhs. In addition, the lower the number of apartments, the higher the demand. It reduces supply and encourages higher prices.
Another disadvantage is that this formula does not calculate the possibility of a sudden leap in price in the future, called leverage. Leverage, for example, means that the sudden emergence of a bridge project means that farmland, which used to be around 500,000 per acre, is now over 100,000 per acre. Sometimes there are such projects, but the rent or income is usually normal. In this case, the regular rental price will still be significantly different from the so-called project price and formula price calculated from the above formula.
But the good news is that when you know the difference, how much does it cost? Is it too much? Should I still buy it? You should be able to predict whether it should stop or not.
The best are:
I am the land. If you are buying an apartment, first calculate the value that should be calculated with the Income Approach. Next, calculate the cost. For example, if a building is built, how many feet wide, what type of building, how much does 1 sf currently cost? It also investigates the current market price of other land and apartments for sale.
Now that you know all three, you can figure out what the current value of the property is.
And then what are the fixes inside and what is the value of that?
So you have to keep thinking about whether the price you are going to buy is worth it or not. For example, when the seller of one of my plots of land could not reduce the price of ten lakhs, I had to negotiate to dig a borehole.
If so, Real Estate Property. We hope you find the tips on investing great worthwhile. Adequate knowledge can easily overcome serious difficulties. More Get Quotes Here…
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