by Elaine Berry

When investing in real estate, the whole point is to make a profit. If you pay too much for your property, you will find there is no profit to be made. The most common - and costly - mistake beginning investors make is to pay too much for the investment property. Thats why for many would-be investors, their first investment is also their last, as they decide it doesnt work.

Well it does work, but it is essential that you learn how to make an accurate estimate of the market value of your potential investment property.

There are three main methods used by property appraisers to reach an estimate of a propertys market value:

• The comparison sales method. This is obtained by researching recent sales prices of properties in the same area and of similar size with comparable features. Allowance must be made for properties that have sold at below market price for some reason, e.g. the seller had urgent reasons for wanting a quick sale.
• Income method, based on the net income the property produces. This is calculated using the Capitalization rate (cap rate), the annual net income divided by the purchase price, and the GRM (Gross Rent Multiplier) - the purchase price divided by the gross operating income.
• Replacement cost method - what it would cost to replace the improvements on the property, minus the cost of the land. You can obtain a replacement cost quote for free by calling a property insurance broker and requesting a replacement cost quote.

In addition to the appraised value, the property will also have a "tax-assessed" value, which is the value at which the property is assessed by the local taxing authority for property tax purposes. You can find this out by visiting the web site of the relevant taxing authority. Roughly this is likely to be about 70 percent of the current market value. This percentage varies slightly from state to state, but the information can give you a working ballpark figure to begin with.

Having obtained this, you can confirm the market value by using the three appraisal methods above. · Search the countys property tax rolls for recent sales of half a dozen properties located within about two miles of the property you are interested in, that are comparable in size and amenities. Averaging out these prices will give you a fair idea of the sort of price you should be looking at. · Get a hold of the income and expense statement of the property you are interested in. You would be wise to verify the figures using independent documentation, including utility bills plus repair and improvement bills for the past year, and the tax assessment income and expense statement on file at the tax assessors office. Then you can calculate the Cap rate and multiply this by the net operating income in order to reach an estimate of the value. · Obtain a free replacement cost estimate from a property insurance broker.

This may seem like a lot of work, but most of it can be done for no cost. At the end of this process you will have a very realistic assessment of the propertys value. It is well worth the effort to avoid costly mistakes that can end your investment career almost before it has begun.

More free information and tips on all aspects of real estate investing, buying and selling, agents and home equity at http://www.bizwrite.co.uk/realestate/realestate.html Visit for our FREE e-course on the A-Z of Real Estate.

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