Sunday, October 16, 2011

Property Valuation in Residential Real Estate Market

Referring to my previous article posted on below link:
http://emfps.blogspot.com/2011_09_04_archive.html
In this article, I am willing to expand this method for the property valuation in Residential Real Estate market.
Of course, by using of this method, we will able to analyze the all valuations such as Bonds, Stocks and so on. 
Now, let me return back to my spreadsheet of excel again and write step by step the method of the property’s valuation.
-On Cells A17 – A23, replace below items:
Ø  On cell A17: Current Price of Property (P0)
Ø  On cell A18: Monthly Rent (Rm)
Ø  On cell A19: Number of months to pay the rent
Ø  On cell A20: New price of property (Pn)
Ø  On cell A21: PV of monthly rent
Ø  On cell A22: PV of new price after period of the time “t”
Ø  On cell A23: Property value
Ø  Between Cell A17 and A18 insert new cell which is Rm / P0
Ø  On cell A16 write “Required Return”
Now, to find the required return, we should use from try and error method just like to my previous article in which Current price (cellA17) will be equal to Property value (cell A23).
Example:
Assume below data are available:
-P0 = $80,000
-Rm = $500
- Number of months to pay the rent = 12 months
-Rm /P0 = 0.5%
-Pn = $100,000 (The anticipation of new price in accordance with research on historical Rm / P0)
By using of a try and error on required return, we can find where Current price ($800,000) is equal to Property value ($800,000.20), the required return is equal to 2.443 % (monthly) and equal to 29.32% annually.
Note:

“When the required return is greater than the Rm / P0, Current price (Value)
will be less than new price (Pn). In this case, the value is said to sell at a
discount, which will equal (Pn -P0).



When the required return falls below Rm / P0, the current price (value)
will be greater than new price (Pn). In this situation, the current price (Value)
said to sell at a premium, which will equal (P0 - Pn).”

To take a better analysis, we can apply the tables of sensitivity analysis as follows:

-The table of Pn – Rm: where independent variables are new price (Pn)
 and monthly rent (Rm) and so dependent variable (the result) is Current
price (Property value)
-The table of the required return – Rm: where independent variables
are the required return and monthly rent and so dependent variable
 (the result) is Current price (Property value)
-The table of Rm / P0 – Rm: where independent variables are Rm / P0
 and monthly rent and so dependent variable (the result) is Current
 price (Property value)
-The table of the required return – Pn: where independent variables
 are the required return and new price (Pn) and so dependent variable
 (the result) is Current price (Property value)



 

Note:  “All spreadsheets and calculation notes are available.
The people, who are interested in having my spreadsheets
of this method as a template for further practice,
do not hesitate to ask me by sending an email to:
 soleimani_gh@hotmail.com or call me on my cellphone:
 +989109250225.
 Please be informed these spreadsheets are not free of charge.”



 

How can we anticipate the new price of the property?

Definitely the answer to this question is not easy only by
 using of above method for instance there are the economic
 indicators such as currency rate, inflation, barrier to entry of
 investors and so on that we should combine with our analysis.

Therefore, at the first, we should conduct the new research on
 PEST analysis then we should find all outcomes which are referred
 to Probability distributions where the finding of the best assumption
 for the required return (expected return) will be a goal for us.
I think that the simulation method included in my article of
EMFPS: Efficient Portfolio of Assets
(The Optimization for Risk, Return and Probability)
posted on the link: http://emfps.blogspot.com/,
Will be a good tool to analyze the
 outcomes inferred from PEST analysis.

PS: “BY DIVERSIFYING YOUR BUSINESS, YOUR EXPIRING DATE
WILL NOT BE FINISHED ANY TIME”