This evening’s class on Real Estate Investments & Finance was really good. I think I actually learned something th
at I will find useful even in 10 years. Andre taught us about the different approaches real estate professionals take when attempting to do a valuation on real estate. Here is some reading materials from Wikipedia that also discusses what I learned about tonight. Here are my Key Takeaways for tonight’s lecture by my professor and from the readings by Jeffrey D. Fischer:
Key Takeaways:
- Real Estate is not like Stocks. Each property is unique, does not trade often, is not liquid and info not always available
- Market Value = Value attached to a typical investor
- Investment Value = Value attached to a property to a Specific Individual (includes Tax advantages etc)
- 3 approaches to appraisal: 1) Cost Approach 2) Sales Approach 3) Income Approach
- All 3 approaches may be applicable depending on availability of info
- In real estate there is never a definitive value. Everything is based on people’s opinions.
- You should use all 3 approaches to value properties if info is available.
- If you are doing a Discounted Cash Flow analysis, do it for a 10 year time horizon
- Cap rates are derived from companies that primarily do surveys on real estate related companies / organizations
- When you make assumptions in the Discounted Cash Flow Analysis, make unbiased assumptions – don’t be overly conservative or overly optimistic.
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