I recently got an email from a reader asking about valuation of a target property and thought this was a good time to recap what we have learned so far. Let me share with you an excerpt from that email…

From: xxxxxxxxxx@yahoo.com.ph
To: moderator@realestateinsight.ph
Sent: Tuesday, June 1, 2010 2:41:17 PM

Subject: Advice with Fort Condo

My husband and I are both working but we feel the money we save will never be enough to cover our retirement. We already have a house in Quezon City and are now looking at buying a ready to occupy condo at the fort. Our agent tells us that it is an excellent investment and is pushing us to close the deal. My question is how do we know if it really is a good buy? Is there a formula we can use? Any advice you can offer will be greatly appreciated.

At the risk of sounding like an advice column, which I don’t mind really, I’d like to respond to this email via this blog post…

I actually have several insights for xxxxxxxxxx@yahoo.com.ph. First, don’t ever let yourself get bullied (pushed) into a deal. Even if it sounds like a good one, it always pays to do the math first before jumping into something as important as real estate investment. That said, let me tell you about a post we did a few weeks back… This was about CapRate (Capitalization Rate). CapRate is a performance ratio that quickly tells you what the Value of a Target Property should be by comparing it with similar properties. Let us look at the example below and see how we can use CapRate to determine if the Value of a property being offered is at par or better than market…

Lets assume we are being offered a 1Br Unit in Serendra for Php 6 Million. We know that CapRates in Serendra (Fort Bonifacio) are at 8%. We also know that rents for 1Br units would give us a Net Operating Income of about Php 600,000 yearly.

So, to determine if Php 6 Million is a good price, let us follow the formula below…

Value = Net Operating Income / Capitalization Rate
Value = 600,000 / 8%
Value = Php 7.5 Million

From the calculation above, we can see that an NOI of 600K and 8% CapRate translates to a Market Value of Php 7.5 Million. This tells us that a purchase price of Php 6 Million is below market and offers a good 20% (Php 1.5 Million) discount.

You can use the same example above to see whether the property being offered is a good deal. Take note that the CapRate for Serendra may be different from the property being offered to you. Its best to ask your agent/ broker what the Property’s CapRate is. If your agent doesn’t know, look for another one. This is basic information that any good Realtor should know.