How to establish value in real estate using IRV

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People often ask how to set real estate value when buying and selling properties.
Well, there is actually a formula. It is lovingly called: IRV.

There are 3 key terms you must know: Income, Rate and Value.  That's right, IRV.
Once you have this concept you can use two to find the third. 
It is merely a formula. We even made it easy for you by putting together the snazzy graphic above.



Here is a closer look: 

  • Income. This is the NOI (Net operating income) which is generated from the investment
  • Rate: (You may want to read this definition last.) Until you have been introduced to this term many are confused but it is really quite simple. This is the cap rate which is similar to a rate of return. The rate of return that an investor expects to receive. The formula to determine the cap rate is NOI (Net Operating Income) Divided by the price of the Property. (Example $100,000 property with a NOI of $10,00 equals 10%) $100,000/10,000 = 10% Note: cap rates are established by finding the average cap rates for your city. these rates will vary based on market conditions and class of properties. Ask Realtors or research a few recently sold properties to establish a realistic average for you area.
  • Value: Value of or asking price of the property

Okay, so the Formula to determine real estate value can always be found within the IRV Formula You can quickly and easily determine all 3 (Income, rate and Value) simply by re-arranging the formula.

How to establish Value of Real Estate

Finding the Income: if you want to know what income should be for a property, you are looking for I

I = Rate x Value

Finding the Rate: If you are looking for what the Cap rate of the property is you are looking for R.

R= Income / Value

Finding the Value: If you are looking for what a value of a property should be You are looking for the V.

V= Income / Rate

Examples

Q: What is the Value of a property where local cap rates are 9% and the NOI is $18,000 per year?

A: V= Income / Rate or $18,000 / 9 = $2000. So if we are looking to sell a property and the current cap rates in an area is 9% and the NOI of the property totals $18,000 we can use the IRV formula to determine the Value that an investor may be willing to pay for a property.

Q. What is the Rate (cap rate of a property) that had a value of $200,000 and NOI of $18,000

A: R= Income / Value or $18,000 / $200,000 = 9%  So if you are looking to buy a property that is for sale for $200,000 and the NOI is $18,000 we can easily use IRV to determine the cap rates. If the cap rate in your buying area is 9% this property is priced right. If cap rates in your area is averaging more like 7% this is considered a very good deal. The alternative is true. If cap rates tend to be double digit in this area and this property comes in at 9% your property cap rate may be considered low and therefor this property may be over priced.

Q: What is the NOI of a property that is listed for $200,000 and has a cap rate of 9%

A: I = Rate x Value or 9% x $200,000 = $18,000.When Investors purchase with cash they tend to pay close attention to the Income. This is also known as cash on cash return. They are simply looking for their return on investment for the cash that they put into he property

Self-Exam:

Q: What is the Value of a property where local cap rates are 10% and the NOI is $10,000 per year?

A:

Q. What is the Rate (cap rate of a property) that had a value of $100,000 and NOI of $10,000

A:

Q: What is the NOI of a property that is listed for $100,000 and has a cap rate of 10%

A:

Larry Arth is a coach and writer for HowToBuyUSARealEstate.com. Contact admin@htbusa.com for information regarding classes and bookings.