Ultimate guide to valuing real estate companies and stock advice, Smart house Tips, Property Gguide
Ultimate Guide to Valuing Real Estate Companies and Stock
7 Apr 2020
Valuing Real Estate Companies and Stocks Guide
Savvy investors are always on the lookout for the next big deal. More and more realise the terrific potential of the real estate sector.
There are many ways to invest in real estate. Principally, many buy properties for low and profit from selling at a higher price. This strategy works for many, but have you considered investing in a real estate company?
Yes, you get to own a piece of the pie, reaping monetary gains without being a typical landlord. Real estate companies operate in a distinct fashion.
Their market valuation can easily appear esoteric.
To avoid burning your fingers, you can invest in some real estate companies that are listed on the stock market. We spoke with instant home buyers (cash offer for your home) and property experts Zoom Property Buyers about Valuing Real Estate and Real Estate Companies.
The aim of this guide is to show you how to work your money through real estate companies.
You will also learn how to value real estate stock.
Stage One
Understand thoroughly what a PE (Price Earnings) ratio is.
The simple formula to calculate this is to divide the current price of a stock by the earnings for the stock.
Thus, PE Ratio = Price of stock/Earning of stock
Stage Two
Look at a few companies you feel are worth investing in.
Determine the PE ratio of each one.
The internet is full of stock market quote tools. Brokers also give this information.
The earnings per share are available within the firm’s annual report. Also, try the Investor Relations pages on the company website.
Stage Three
Measure how each PE ratio sits against the average PE for the real estate sector on the stock market.
Many websites committed to investment research can help with this.
Stage Four
Find out if a company is undervalued or overvalued based on the outcomes of your stage three research.
A company is undervalued when its PE ratio sits below the industry average.
Stage Five
There is more you can do with the industry average.
The PE ratio is the quotient of price and earnings. You can safely determine a share price by multiplying the average PE ratio by earnings per share.
Going further, you can multiply this share price by the number of shares outstanding to determine the company’s market value.
Other parameters key in determining the intrinsic value of a real estate stock are:
- ‘Landbank’ size (revealing growth in company revenues) with special attention on:
- project execution time
- margins of projects
- Management
- Key ratios such as
- working capital to sales
- debt to equity
iii. operating margins and return on capital used
Now that we have a simple blueprint to assess a company’s holistic value, how do we value its real estate stock?
Remember that you determine a property’s value before a sale or purchase to maximise profit.
Do exactly the same with a real estate stock.
Three common techniques based on property type and data availability are:
- Income Technique
This method applies to income-yielding properties.
The value of a property is based on the income it generates.
Here, capitalisation rate–the potential rate of return on the real estate investment––and net operating income are used to estimate property value.
Discounted cash flow is also often used to determine property value.
Let’s look at the capitalisation method.
- Know the net operating income. All operating expenses (not including the monthly mortgage) are subtracted from the rental income to arrive at the net operating income.
Net Operating Income = Gross Income–Operating Expenses
- Know the desired ROI (return on investment). Such expectation and monthly rental plug into the following formula for deriving property value:
Capitalisation Rate = Net Operating Income/Purchase Price or Property Value
Hard figures will lend clarity to the explanation.
You are considering buying a flat.
Your planned rent amount = £400 per month
Expected return = 4%
Calculated purchase price = (£400 x 12 months) / 4% = £120,000
- Sales Comparison Technique
This is also called the market approach.
It estimates property value based on the selling prices of similar properties sold recently.
It is the preferred method to determine the value of family homes.
The features of each property are used to adjust the selling price. Thus, if a feature is available on the subject property but absent on the comparable property, the selling prices are adjusted upwards, and vice versa.
To use the market technique:
- Find similar properties with recent sale profiles.
- Make price adjustments to account for variations in size, quantity, location, and so on.
- Cost Technique
This technique is based on the cost to build or replace the property.
It is commonly used on new buildings and requires knowledge of material and construction costs.
Buildings with few recently sold comparables and which have no rental income also enjoy this approach.
The key factors include:
- land value
- cost of building structures
- depreciation expenses
These are plugged into the following formula:
Property Value = (Replacement/Reproduction Cost of Building – Depreciation) + Land Value
The reproduction cost is the cost of completely duplicating the property’s structure, while the replacement cost is the cost of building a similar structure using current methods and materials. It is more commonly used.
Remember that companies typically look at the net present value and depreciation costs when deciding which assets require to be replaced and whether the cost is worth the expense. When determining the replacement cost of an asset, a business should take into account its depreciation to expense its cost over its useful life. Also, you can account for this free online depreciation calculator to calculate the depreciation of an asset over a specified number of years corresponding to the different deprecation methods. If you want to calculate depreciation of residential rental or nonresidential real property, then all you need to try the property depreciation calculator.
The three methods for estimating the reproduction or replacement costs are the square foot (comparison), quantity survey, and unit-in-place methods.
Comments on this Ultimate Guide to Valuing Real Estate Companies and Stock article are welcome.
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n.n. – Residence near Moscow, Russia
Design: J. MAYER H. und Partner, Architekten mbB, with Alexander Erman architecture & design
photo : Ilya Ivanov
n.n. – Residence near Moscow
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