Two Steps To Take When Valuing Any Real Estate Investment Property

Whether you are investing in actual real estate or just in real estate stock, keep two important guidelines in mind when attempting to value the investment: (1) do not pay more than the land is worth and (2) do not pay more than the business is worth.

1. For any real estate stock purchase, you should never pay more than a 10 percent premium to the properties’ fair market value; when purchasing material real estate, in the same way, never pay more than 10 percent over comparable neighborhood properties. In fact, try to buy the property at about a 20 percent discount (even if you need to do some minor fixing up after purchasing).

2. A real estate investment should be treated like a business. Like a business, it also has profits and losses in the form of rent and expenditures. Look at the long-term P/E ratio of your prospective investment (don't look too closely at the short term); it will tell you a great deal about the inherent value of the piece of real estate.