Property investment evaluation and the estimation/assessment of the appropriate purchase price that will be consistent with the investor's return and risk objectives does not end with the completion of a valuation of the property.
First of all, any evaluation of a particular property investment has to be carried out within the context of the investor's broader real estate investment strategy.
An important part of property investment evaluation is the careful examination of the assumptions of the investment valuation report,which is typically carried out using the discounted cash flow in combination with the sales comparison approach.
Crucial assumptions that need to be examined carefully, and ideally be verified through a thorough market analysis study for the particular property under consideration, include projected rents/ prices, as well as costs over the holding period. Such projections need to be consistent with the findings of the market study in terms of projected demand-supply imbalances in the local marketplace within which the property is competing for tenants or buyers.
For example, if the market study predicts increasing oversupply of properties competing with the particular property under consideration, any assumptions of increasing rents and/or prices in the valuation report need to be carefully examined and thoroughly justified.
The ultimate objective of property investment evaluation is to either estimate the expected return that can be achieved by the property given the seller's asking price, or the maximum purchase price that can be paid by the investor given the expected net cash flows from property ownership and the investor's minimum required rate of return.
