The methods for analyzing the value of a real estate investment are analogous to those used in the fundamental analysis of stocks. Because real estate investment is typically not a short-term trade, analyzing the cash flow, and the subsequent rate of return, is critical to achieving the goal of making profitable investments.
To profit, investors must know how to value real estate and make educated guesses about how much profit each will make, whether through property appreciation, rental income, or both. Accurate real estate valuations can help investors make better decisions when it comes to buying and selling properties.
Equity valuation is typically conducted through two basic methodologies: absolute value and relative value. The same is true for real estate property valuation.
Discounting future net operating income (NOI) by the appropriate discount rate for real estate is similar to discounted cash flow (DCF) valuations for stock. Meanwhile, integrating the gross income multiplier model in real estate is comparable to relative value valuations with stocks. Below, we'll take a look at how to value a real estate property using these methods.