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ALL ABOUT REAL ESTATE INVESTMENT STRATEGIES
Establishing "Investment Value How do you determine your'investment value' in an income producing property ? The prudent investor will have a pre-determined after-tax return requirement prior to entering into an investment. The investors after-tax return requirement is the determinant factor in arriving at investment value of a property to that particular investor. As the investor, your primary concern should be with the investment value as opposed to the appraised value of an investment property. Standard procedure in most property settlement agreements is to arrive at a value of the property through an appraisal of the property by a qualified appraiser. That approach to value will certainly suffice in the case of a non-investment property, such as a residence. However in the case of an income producing property, an appraisal might be considered a first step in arriving at value. Continued below
In the case of a partnership dissolution, or perhaps a divorce, the interest of one or the other of the parties might be greatly enhanced through an "Investment Value" analysis. A primary concern in determining the Investment Value of an investment property lies in how well the investment is projected to perform in the future on an after tax basis. "Investment Value" can be defined as the price an investor can afford to pay for an investment property that will support the investors after-tax and wealth accumulation objectives. An investors prerequisite after-tax return will dictate the investment value, meaning how much the investor can afford to pay for a particular investment property...to the dollar. Investment Value on a given investment property can vary with the after tax return and wealth accumulation objectives of a particular investor. Again, as the investor, your concern is in how that investment will perform for you in the future. You could care less how much similar properties previously sold for, or what the replacement costs would be in today's market. Your interest as the investor is in how the investment will perform for you in the future on an after tax basis. Will it satisfy your investment goals, what is the price you can afford to pay for the property that will support your after tax return pre-requisites ? A lending institution generally relies on a formal appraisal demonstrating what similar properties have sold for in the marketplace, or perhaps discounting future cash flows to a present value with positively no consideration for the impact of taxes on those future cash flows. An investor's primary concern however, should be how well the investment is projected to perform in the future, on an after-tax basis. While a formal appraisal (performed by a qualified appraiser) is essential in every investment real estate transaction, it is not the complete picture for the investor. . .it does not address Investment Value. In comparison, an appraisal might be referred to as a black and white snapshot of the investment, spelling out a history of the property and documenting comparable sales data, replacement costs, and perhaps discounting before-tax cash flows to a present value. An after-tax investment value study might be likened to a full length color video of the investment. An investment value study will audit existing income and expenses, analyze and restructure existing leases where necessary, analyze future cash flows on an after-tax basis considering current as well as pending tax legislation, and how they might be expected to impact the value of the investment. Nothing short of an after tax investment value analysis will serve the best interest of the investor. While an investment value study is an important prerequisite in the acquisition of an investment property, the study also plays a vital role in the disposition of an investment property. Prior to taking an investment property to the marketplace, an investment value study can serve to support and substantiate an attractive value in the eyes of a buyer/investor. About the
author: Stewart L. Mac Donald, CCIM, is
President of Real Estate Assets, Inc., a consulting
services company focused on maximizing wealth through Asset
Management in the real estate portfolio. Mr. Mac
Donald has counseled on and has been an active participant in a
wide range of investment real estate projects. He has written
and presented seminars on "Strategic Planning in the
Investment Real Estate Portfolio" before bar associations,
financial planning and investment groups. | |
