Real Estate Valuation: How to increase value of your Property?

This is in continuation to our real estate valuation discussions in our last posts:

• Valuation by Rental Prospects - Real Estate Valuations
• Can Value in Real Estate be created, artificially?
• Valuation of Real Estate: How can you value your RealT?

Everyone, including you & us, is looking to make money in real estate & increase valuation of assets. Today let’s discuss how you can increase your assets’ worth manifolds, just by a small manipulation.

Recipe to Increase Asset Value

This might look like an unorthodox and risky approach to some of our readers, but it works.

‘You find an uninhabited area in the city, almost barren land, where no one would want to reside. Increase the worth of the area and exit gracefully.’

To explain in detail, let’s consider the following real case study:

Following is the satellite snapshot of an uninhabited area in Udaipur, Rajasthan (India).

Satellite snapshot of Chitrakoot Nagar, Udaipur

Surely no one would prefer to build a house in this part of the city. But now let RealT Horizon guide you on how to create value in this region.

If you look carefully, you will see some upcoming development in the nearby region (as shown below).

Potential & developing areas marked in red

As the area is uninhabited, most likely you will find the land in the potential marked area in the above snapshot at very nominal price. Now as an investor you have following choices:

If you go for this option, you will help others and make losses yourself. You will purchase the plot and struggle to receive the returns which this property is capable of providing.

You will create a handsome chunk of fortune for yourself by this decision. Suppose you have bought 3 plots here. Construct a building on one plot and sell it at par with your costs. Once one building has been constructed in the area, the prices shoot up for the remaining plots. Now you can make a good fortune on your remaining 2 plots.

You miss out on a golden opportunity in this area.

The reason why this area will develop in due course of time is because there is a developing area in the vicinity.

So in this manner, you have created money out of a barren land, just by streamlining your investment decisions.

Disclaimer: The above analysis is based on our understanding and experience. What happens in future will totally depend on your due-diligence about the area in the picture!

------ Thanks for reading RealT Horizon J ------

Valuation by Rental Prospects - Real Estate Valuations

In our post - Valuation of Real Estate: How can you value your RealT?, we discussed about various parameters one should consider while valuing a RealT property. Today let’s discuss about one of the technical tools of valuation which forms a vital component of this process.

Today we will discuss about a monetary parameter of valuation. We will take a simple real-life case study and show how ‘Rental Income’ played its role in constituting the value of that asset.

Before we begin, let’s make some validated assumptions. We are saying ‘validated’ because the case we are discussing here is a real life case.

Case Study: Rental income from an asset in Civil Lines, Kota (India) [Places’ names have been changed deliberately]

An asset was bought by a person, 10 years back, in a posh locality in Kota, Rajasthan (India). Following are the assumptions:

Purchase Price	INR 2 million
Upfront Investment in Maintenance	INR 400,000 (20% of purchase price)
Yearly Maintenance Cost	INR 100,000 (5% of purchase price)
Initial Rental Income	INR 7,000 (Validated from Case Study)
Appreciation in Rental Income per annum	8% (General practice, as well as validated)

We are not taking into account the time-value-of-money & the appreciation in the asset’s value over the time. This is just to keep the things simple and calculate the impact of only Rental Income as compared to the investments in the asset.

Following are some basic calculations of total Investments and Returns in the form of Rentals:

All figures in INR '000. Click to enlarge.

 =>  Returns from only Rental Component as compared to the overall investments:

This figure shows that this person has recovered his 41% investment in the property, just by rental incomes! He didn't have to do anything in earning this revenue.

Beauty of Rental Income

The above discussed case study clearly shows that Rental Income indeed forms a vital component in the overall valuation of any asset. It is just like dividend investing: you keep on getting recurring returns on your invested money, leave aside the appreciation in the asset.

So next time you think of investing somewhere, just evaluate whether or not that asset is capable of generating recurring returns in the form of rental income!

------ Thanks for reading RealT Horizon J ------

Can Value in Real Estate be created, artificially?

In our last post – “Valuation of Real Estate: How can you value your RealT?” we touched upon the parameters one should look for while valuing a Real Estate property. Today let’s discuss if it’s possible to create the value artificially?

Creating Value – What it means?

Creating value in its generic terms means – artificially manipulating the price of an asset.

Take for example:

•  “Black Tickets”: You went to watch your favorite movie, say Iron Man, in the nearby theatre. Due to unavailability of seats, you are denied the tickets. But then an agent comes to you, offering tickets for the movie at a premium of 25%: He has created the value artificially.
• “Polished Antique”: You found an antique while roaming in the fields. It resembles nothing, but a broken stone. You go to market to sell it & you will not even receive peanuts in its exchange. But the moment you have polished it and packaged it nicely, you will get jaw-dropping quotes for the same piece. Here you have created the value artificially.

So to put in very nominal terms, creating value is nothing but adding & utilizing factors that affect the ultimate value of the asset.

Artificial Value in Real Estate

In our last post we mentioned the parameters that affect the value of Real Estate:

Now if one wants to create value artificially, he will definitely have to manipulate the above factors for the same. Let’s see how:

  

Parameter	How to Manipulate?
Utility	Play with the buyer’s psychology. If the buyer is interested in making money out of this property, show him the channels. Project your property as a great prospect deal for a Hotel or Hostel. If he is just looking for a comfortable stay, show him the prospects of luxurious property. Once you have convinced the buyer on this, you have created the value!
Demand & Supply	These are the parameters which builders manipulate the most. Demand is manipulated by quoting unreasonably high pieces. By doing so, builder creates an impression of high prices in the region. Moreover builders posts high bids for their properties on the internet, impersonating themselves as buyers to create artificial demand. Supply is manipulated by incorrectly projecting the number of units remaining in a project.
Transaction	Manipulation in this aspect depends on the network you have. If you have a well-established network of brokers and agents, you can ease out the transaction and hence create value in the deal.
Psyche	This is as simple as “polishing the antique”. You polish, renovate and beautify your property and charge as much as 25% more on an investment of 10%!!

Closing Remarks: Listed above are some of the ways in which a person can create the value in Real Estate, artificially. But it’s better not to underestimate the cognizance of buyer! ;-)

------ Thanks for reading RealT Horizon J ------