Real estate valuation - WACC/Discounting

Hi guys,

I wanted to ask you guys about property valuation. After attending several real estate meetups recently, I have noticed the different valuation methods that people use when ascertaining their returns pre-purchase. I've been trying to find more information on the discount rates/WACC estimation for residential real estate, and have noticed that it's not as clear cut as valuation for a company/investment.

From what I gather there are two common methods:
1) Base rate (interest rate)+ the premiums (i.e liquidity risk, returns)
2) Top down approach: average of what investors in the same area expect

After checking these out I wanted to asked if you guys utilize WACC/discount estimation into your assessment of valuation of a viable real estate investment? if so do you use the above methods?
Or am I completely wrong?

Thanks!
Kai

 

Portfolio theory is fine provided you are analysing equities or have a substantial property portfolio across several lenders on different terms.

Back of an envelope evaluations should suffice unless you're already using Dyna, Cougar or MRI.

 

I remember doing these calcs at uni trying to align property prices to the present value of future expected income. Nope. Doesn't work that way.

These calcs fail to take into consideration the biggest price factor which is EMOTION.

Given that the bulk of the market is owner occupied they drive the prices and investors are price takers. No owner is concerned about how much rent they're going to receive from the house they plan to live in until the sunset of their life.

 

Commercial market is a different story, which is basically the only place these methodologies are used. Like you said, it's a bit pointless for residential.

 

Thanks for everyone's insight into the valuation of residential properties!

@Scott No Mates Haha, I knew that valuation of residential (non-multifamily/noncommercial) was going to more of an art form and I was too naive to hope that there was going to be a MRI/Dyna/Argus equivalent to help reduce the risk of investment.

 

WACC is nothing more than your own cost of capital.. how you come up with that number is up to you.

NPV/DCF analysis is a waste of time for personal investing. All it really does is help you compare investment options that use the same macro economic assumptions, but have different input variables.