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Property valuation
Learn all about the valuation of investment properties: what are market value, income value, capitalization rate and the DCF method?
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A sound property valuation is the basis for successful investment decisions. Whether you want to buy, sell or mortgage a property – the true value is crucial. Especially for investment properties that generate rental income, it is essential to know the realistic price and the expected returns.
Depending on the situation, different valuation methods are used. Particularly relevant are the income value method, which is closely linked to the capitalization rate, the discounted cash flow (DCF) method and the market value. Each of these methods has specific uses and strengths: While the income value allows for a quick assessment of the return, the DCF method provides a more detailed forecast of future cash flows. The market value, on the other hand, reflects the current market price of the property.
We provide you with a brief overview of the most important valuation methods, their areas of application and the key figures that you as an investor should know.
The income value method is the central valuation tool for investment properties. It is used to determine the value of a property based on the consistently achievable income – that is, the net operating income that can be generated in the long term through rental income. The income value thus shows the potential returns from an investment property and is a crucial indicator for the profitability of an investment. The income value method is typically applied to multi-family units with a stable rental income.
However, it should be noted that the forecasts are not always accurate. Although trends can be taken into account, they cannot be predicted with absolute certainty.
The discounted cash flow (DCF) method is primarily used for complex investment properties, major investment decisions or uncertain revenue streams. While the income value method assumes stable rental income, the DCF method analyzes the future development of a property in much more detail.
The market value is the estimated price that a property would achieve under normal market conditions on the valuation date. The Swiss Valuation Standards (SVS) define market value as follows:
“The market value is the estimated amount for which a real estate asset should be exchanged on the day of valuation between a seller willing to sell and a buyer willing to buy, after a reasonable marketing period, in a transaction in the ordinary course of business, with each party acting with expertise, prudence and without coercion”.
The valuation is therefore based on a fictitious, neutral sale situation – without taking individual circumstances into account. The following are not taken into account:
Thus, the market value represents the current market price and differs from the income value, which reflects the sustainable income value of an investment property.
The market value of a property is influenced by numerous objective factors, including:
These factors are examined systematically and form the basis of a well-founded valuation.
The standard land value is a central indicator in determining the market value. It indicates the average value of a square meter of land in a certain location and is determined on the basis of purchase prices of comparable properties.
Standard land values are usually published by appraisal committees or authorities and are an important guide for buyers, sellers and investors. A high standard land value indicates a sought-after location with high demand, while a low value often refers to less attractive locations.
In the determination of the market value, the standard land value is the basis for the valuation of the plot of land of a property and is therefore an indispensable part of a sound valuation.
In addition to the income value method, the DCF method, and the market value, which are central for investment properties, there are other recognized valuation methods:
In the comparison value method, the property is compared with comparable properties that were sold recently. Factors such as location, size, condition and amenities are all taken into account. This method is particularly suitable for standard properties such as single-family homes or condominiums in established residential areas, where sufficient comparative data is available.
This method is often used for owner-occupied properties, especially for special buildings or properties without sufficient comparative values. The value is the sum of the land value and the restoration costs of the property – minus the depreciation due to age or wear and tear.
The method used in each case depends on the type of property, how it is used and the market data available. Each valuation is based on professional assumptions and serves as a basis for a transparent assessment – however, it is no substitute for individual advice.
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Valuing a property requires the consideration of numerous factors, which often poses a challenge for laypeople. It is therefore advisable to have a professional property valuation conducted.
How much does a professional property valuation cost?
The cost of having the value of house or apartment appraised by a certified professional depends on multiple factors:
What is the report needed for?
The purpose of the valuation plays a crucial role in the choice of valuation method.
A professional property valuation not only provides a solid basis for decisions but also creates transparency and security.
A sound property valuation is the basis for secure investment decisions – especially for investment properties. The best method strongly depends on the property and the purpose of the valuation:
The DCF method is particularly relevant for institutional investors, while the comparative value method is often used by private individuals. In practice, the methods are often combined to assess both the income value and the marketability of an investment property.
This creates a sound basis for decision-making for buyers, sellers and investors. Since the determination of capitalization and discount rates, standard land values and future cash flows requires expertise, it is worth collaborating with a professional valuation expert.
Arrange an appointment for a non-binding consultation or if you have any questions, just give us a call.
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