VALUE OF PROPERTY1) The characteristics of the property under consideration and its immediate environment Smart property investors that aim in achieving significant profits need to understand very well what factors and dynamics can trigger significant increases in the value of property. Obviously, if the value of a property increases significantly after its purchase, the property investor will make a significant profit in the form of capital gains, or appreciation return. Appreciation return is the percentage change in the value of a property over a particular period. Within this context, investing successfully in property has a lot to do with identifying properties that have strong prospects for value increases. The major forces that can help or destroy a property investor from this point of view have to do with local market conditions.
If the demand for the type and quality of property we are looking at exceeds the supply of similar properties in the local market, then it is very likely (all else being equal) that the value of the property under consideration will be rising in the future. The pace at which the value of property will be rising will depend on the magnitude of the deficit of the supply compared to demand. The larger the supply deficit, as percent of total demand, the faster the value of property under consideration will be rising. Therefore, smart investing requires identifying first markets and property types that are characterized by non-negligible supply deficit. The e-book Real Estate Investing for Double-Digit Returns provides several clues for identifying such markets and property types. On the contrary, if the demand for the type and quality of property we are looking is lower than the supply of similar properties in the local market, then it is very likely (all else being equal) that the property under consideration will be declining in the future. The pace at which the price of the property will be falling will depend on the magnitude of the deficit of demand for the particular type of property compared to demand. The larger the demand deficit as percent of total supply in the local market, the faster the value of the property under consideration will be dropping.
2) The income capitalization technique, which is used in the case of income-producing properties, such as apartments, office buildings, etc., and calculates the value of the property as the Net Present Value (NPV) of its future cash flows over the expected holding period 3) The replacement cost approach, which is rarely used to estimate the market value of property, unless it is a special property like a museum, library, public building, etc. This technique estimates how much it would cost at the time of valuation to reproduce the exact same property at the exact same condition. 4) The residual approach, which is used to estimate the value of land plots. This approach estimates the value of a land plot as the residual between the value of the developed property and the total cost to develop it (including the required profit by the investor/developer)
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