Property Acquisition Price

It is the most important investment decision because it incorporates and reflects the assumptions of the purchaser in terms of the future income of the property and its appreciation potential.

If these assumptions do not materialize as expected, then the property investor may end up making a very small profit, unworthy of the risk taken by acquiring the property, or even lose a small or a large part of the capital invested.

For this reason, prudent property investing requires a very thorough and conservative assessment of the prospects of the property examined, so as to derive a purchase price, which will reduce the investor's risk.

Property investors need to be especially cautious in hot markets in which prices are rising fast, because market prices are set at such levels that reflect rapid price growth expectations in the future. In such market environment, the investor is really a price taker and it is extremely difficult to acquire a property with conservative assumptions regarding future price growth, because there are lots of investors that are willing to purchase at prices reflecting non-conservative price appreciation assumptions.

The property acquisition price needs to be calculated using the discounted cash flow (DCF) model taking into account all future revenues and expenses and their expected timing. A very important factor in such estimation of the proper property acquisition price is the discount rate used in the analysis, which needs to reflect the investor's minimum required rate of return given his/her risk profile and the risks characteristics of the property.