How Much Is
Your Property Really Worth?
I’m often surprised at the number of investors
who do not know how to determine the value of
real estate. As an investor, it is crucial that
you are able to determine value for yourself and
not leave it up to someone else. The three
primary yet different ways of determining value
with real estate are the CMA, the Income
Approach method and the Replacement Cost method.
The CMA (Comparable Market Analysis) method is
based on what similar or comparable properties
have sold for in the past, typically within the
last three months. The CMA is the most common
valuation method for residential single family
homes. However, it’s typically the least
favourable valuation method for investment real
The Income Approach method of valuation puts a
value on the income generated from the property.
This is the valuation method investor’s use most
when evaluating an income property.
Finally, the Replacement Cost method of
valuation is simply what it would cost to buy
the land today and build a new building with the
same square footage with similar features.
Let’s use an example to illustrate the
differences between the valuation methods and
assume for a moment that we are talking about a
three bedroom home with a two bedroom basement
suite. The main level of the home is 1,000 sq ft
and so is the basement for a total of 2,000
finished sq ft. The home is occupied by the
seller and the seller collects $1,000 per month
from the suite and the tenant pays for their
portion of utilities in addition to their rent.
The seller is asking $400,000 since a realtor
told the seller that the CMA (Comparable Market
Analysis) showed that similar properties in this
neighbourhood have recently sold in this price
range. This is the CMA value which is again what
the market is currently willing to pay.
We can determine what the income is worth from
an Income Approach method of valuation. Since
the seller occupies the main house and we know
the market rents in the area, we can quickly
estimate that the home would rent for $1,500
month plus utilities. Including the suite income
of $1,000 we would have a total of $2,500 in
total gross income.
We then deduct all of the expenses, not
including financing. Let’s assume that we have
calculated the property taxes, insurance,
vacancies, advertising, management, repairs and
maintenance and a monthly miscellaneous
allowance totaling $900 in monthly expenses.
That leaves $1,600 ($2,500 - $900) remaining
each month which is the amount left over to pay
By running a simple mortgage calculation based
on $1,600 per month for a mortgage payment using
a 25 year amortization and a 4% interest rate,
the amount of mortgage that a $1,600 payment can
support is $304,000. Adding a 20% down payment
of $76,000 on to the mortgage amount would give
a maximum Income Value of $380,000. ($304,000 +
The final method in determining the value of
Real Estate is using the Replacement Cost method
of buying the land in today’s market and
building a new home with the same square footage
and similar features.
Every area is slightly different and this method
requires some knowledge of current costs of
construction. Once you’ve determined the cost of
new construction, you can use a quick formula by
taking the total square footage and multiplying
it by the current construction cost per square
Currently in my area, a standard 3 bedroom home
with builder grade finishing would cost
approximately $120 per sq ft. Multiplying 2,000
sq ft by $120 per sq ft equals $240,000 to build
a new 2,000 sq ft building. The land in a
similar neighbourhood would cost approximately
$250,000. Therefore with land and building, it
would cost approximately $490,000 to build new.
By using all three valuation methods we can see
that the market (CMA) is $400,000. The income
supports a value of $380,000 or less and to
build new would cost approximately $490,000.
By paying less than $380,000 you are paying less
than the income value, less than market value
and less than replacement cost. You are now
equipped to easily determine if you are just
paying market value like everyone else or in
fact buying a valuable piece of real estate.
Go ahead and try this quick calculation in your
market - you may be surprised.