It is a type of real estate evaluation method that allows
investors to estimate the value of a property based on
the income generated by the property
It is typically used for income generating properties and is to
evaluate real estate.
The approach uses the
income generated by
the property to
estimate fair value.
It is calculated by dividing the
net operating income by the
A buyer should pay special
attention to the state of the
property, operational efficiency
and vacancy when using the
With the income approach, an
investor uses comparable market
sales to choose a capitalization rate.
For example, when valuing a
four-unit apartment building in a
specific county, the investor looks at
recent sale prices of similar
properties in the same county. After
calculating the capitalization rate,
the investor can divide the NOI of
the rental property by that rate. For
example, a property with a net
operating income (NOI) of $ 700,000
and an elected capitalization rate of
8% is worth $ 8.75 million.
BY ANA FERNANDA CARABALI G.
It is an option available to a company's managers regarding business
investment opportunities. It is known as "real" because it usually refers to
projects that involve a tangible asset rather than a financial instrument.
By analyzing the real value of the options (ROV), managers
can estimate the opportunity cost of continuing or
abandoning a project and making decisions accordingly.
Actual options may
include the decision to
expand, defer or wait, or
abandon a project.
Actual options refer to
projects that involve
tangible assets versus
Companies make decisions
or options that give them
flexibility and potential
benefits when making future
McDonald's Corporation (MCD)
has restaurants in more than 100
countries, and let's say the
company's executives are
considering the decision to open
additional restaurants in Russia.
The expansion would fall into the
category of a real option to
expand. It would be necessary to
calculate the investment or
capital outlay, including the cost
of physical buildings, land,
personnel and equipment.
However, McDonald's executives
would have to decide whether
the revenue obtained from the
new restaurants will be sufficient
to offset any potential country
and political risk, which is
difficult to assess.
It is a method of real estate valuation that assumes that the price that a buyer
must pay for a property must be equal to the cost of building an equivalent
building. the market price of the property is equal to the cost of land, plus the cost
of construction, less depreciation
Reproduction method: This
approach considers that a
replica of the property is built
and pays attention to the
duplication of original materials.
Replacement method: In this case, it is
assumed that the new structure has
the same function as the newer
materials, using current construction
methods and an updated design.
The cost approach is
considered less reliable
than other real estate
valuation methods, but
it can be useful in
Special use properties
Determine the value of
buildings for exclusive use,
such as libraries, schools or
churches. These resources
generate little income and
are not usually
invalidates income and
Construction lenders require cost
approach assessments because any
market value or income value
depends on the standards and the
completion of the project.
A cost approach can be
functional utility or
quality of materials
It is a method to determine the value of an asset based on the
sale price of similar assets. Study recent sales of similar assets,
making adjustments for differences between them.
The market approach excels in situations where there is
abundant data available on comparable transactions.
When such data is not available, alternative approaches
may be required.
Because the market approach is
based on comparisons with similar
assets, it is most useful when there is
substantial data available on recent
sales of comparable assets.
ADVANTAGE AND DISADVANTAGE
It is based on publicly available data on
comparable transactions. As such, it may require
less subjective assumptions than alternative
It may be impractical in situations where there are few
comparable transactions, as in the case of a private
company that operates in a niche market with few
When we search the market to buy a new apartment. We found a list of an apartment in your preferred
neighborhood that is offered for $ 200,000. The unit is a 1 bedroom, 1,000 square foot apartment with 1
bathroom. It is in good structural condition but requires some minor renovations. Although you are in a
desirable neighborhood, your view is obscured and you don't have a washer or dryer in the room. Even
if you like the apartment, you feel that the initial price is too high. Since the apartment has been on the
list for more than a month, it begins to suspect that if it makes a fair offer, the seller could accept it
even if it is below its sale price. To that end, he dedicated himself to determining the fair market value
of the apartment by looking for examples of similar apartments in the same neighborhood that were
sold in the last year.