Investment rating for real estate
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An investment rating of a real estate property measures the property's risk-adjusted returns, relative to a completely risk-free asset. Mathematically, a property's investment rating is the return a risk-free asset would have to yield to be termed as good an investment as the property whose rating is being calculated. The underlying drivers for property ratings are the dividends (net
operating income In accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm's profit that includes all incomes and expenses (operating and non-operating) except interest expenses and income tax expenses. Operating income and opera ...
) and
capital gain Capital gain is an economic concept defined as the profit earned on the sale of an asset which has increased in value over the holding period. An asset may include tangible property, a car, a business, or intangible property such as shares. ...
s over a certain holding period, and their associated risks or variances. Similar to other financial ratings developed for
mutual fund A mutual fund is an investment fund that pools money from many investors to purchase Security (finance), securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV in ...
s and stocks, it can be assumed that investors have constant relative risk aversion over the wealth derived from other sources and from their investments. For simplicity, it can also be assumed that the investment return is not correlated with other sources of wealth but represents 100% of the investor's wealth. A property's investment rating is then a transformation of the risk-adjusted averaged return to a single number that conveys the property's long-term potential to yield profits.


Home as an investment asset

Adam Smith Adam Smith (baptised 1723 – 17 July 1790) was a Scottish economist and philosopher who was a pioneer in the field of political economy and key figure during the Scottish Enlightenment. Seen by some as the "father of economics"——— or ...
wrote in
The Wealth of Nations ''An Inquiry into the Nature and Causes of the Wealth of Nations'', usually referred to by its shortened title ''The Wealth of Nations'', is a book by the Scottish people, Scottish economist and moral philosophy, moral philosopher Adam Smith; ...
over 200 years ago that "a dwelling-house, as such, contributes nothing to the revenue of its inhabitants". The Economist has reported that most Americans were treating their homes as an investment till 2008. The traditional belief that
home ownership Owner-occupancy or home-ownership is a form of housing tenure in which a person, called the owner-occupier, owner-occupant, or home owner, owns the home in which they live. The home can be a house, such as a single-family house, an apartment, c ...
is a necessary milestone to acquiring wealth still holds. Not everyone considers their home as a long-term Property investment asset; some believe they can get better returns in other assets. By owning a home to live in, the owner not only saves on rent but also benefits from any long-term price appreciation. And investors, those that buy a home to rent out, are in it primarily for financial gains, be it monthly
cash flow Cash flow, in general, refers to payments made into or out of a business, project, or financial product. It can also refer more specifically to a real or virtual movement of money. *Cash flow, in its narrow sense, is a payment (in a currency), es ...
income, long-term gain, or a combination of both. But, investors and live-in home owners alike should care for the net returns a home can yield, since it is, for most, the single largest investment they will ever make.דירות למכירה בפלורנטין
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Rating evaluation

Objective evaluation of a property's intrinsic long-term "worth", requires a rating process as mature as the process for stocks and funds. Knowing a property's current
market price A price is the (usually not negative) quantity of payment or compensation expected, required, or given by one party to another in return for goods or services. In some situations, especially when the product is a service rather than a phy ...
is necessary, but not sufficient, especially in uncertain times. There are hundreds of macro and micro factors that could potentially impact a property's financial returns, including price appreciation, ability to put it on rent, and vacancy,
fair market value The fair market value of property is the price at which it would change hands between a willing and informed buyer and seller. The term is used throughout the Internal Revenue Code, as well as in bankruptcy laws, in many state laws, and by several ...
, mortgage, maintenance expenses,
property tax A property tax (whose rate is expressed as a percentage or per mille, also called ''millage'') is an ad valorem tax on the value of a property.In the OECD classification scheme, tax on property includes "taxes on immovable property or Wealth t ...
,
property management Property management is the operation, control, maintenance, and oversight of real estate and physical property. This can include residential, commercial, and land real estate. Management indicates the need for real estate to be cared for and mon ...
fee (if any), and
home insurance Home insurance, also commonly called homeowner's insurance (often abbreviated in the US real estate industry as HOI), is a type of property insurance that covers a private residence. It is an insurance policy that combines various personal insur ...
. Add on top attributes that span markets, housing, government, community, demographic and lifestyle parameters. A sound rating analysis should cover all aspects of location – national, state, metro, county, city, tracts down to neighborhoods and the property itself. One should be able to measure and factor in the inherent risk/volatility in all of these attributes to arrive at a measure that can be correlated to a financially sound decision on the next home purchase No one has a crystal ball, of course. So, any rating of this nature should be interpreted as a 'relative' measure, and used as a way to rank/compare homes for their relative investment potential. In other words, a highly rated home is likely to outperform a low-rated home. So, homes in the top quartile are most likely to outperform all other homes.


Advantages of real estate rating

* Investors ** Locate best places to invest ** Identify properties with the most value ** Provide objective criteria to establishes the right price range ** Compute rent income to expect ** Project expected long-term cash flow and appreciation * Sellers and listing agents ** Calculate best price for rapid sale ** Help in expanding properties market to national buyers pool ** Differentiate values of properties ** Build confidence in the value of a transaction * Lenders ** Establish collateral value (both current & future) of a property ** Assess potential loss in a foreclosure ** Simplify decision to either foreclose or modify a loan


Rating systems


InvestMarq.com CashflowScore

FinestExpert.com FE-Score
* Case–Shiller home price index * Morningstar for funds and stocks: *
Paper

Fitch rating for residential mortgage backed securities

Myrealestateteam.net
* S&P Ratings *

*
S&P direct property fund ratings: forward-looking qualitative assessment

Country investment ratings: Shows the countries where buy-to-let property earns the highest returns



References


See also


Investment Grade Net Lease Credit Tenants

My Real Estate Team

Investment Grade
{{Real estate Real estate valuation Real estate investing