Valuation of Investment or Vacation Real Estate in Divorce
Posted By Colgan & Associates on Oct 26, 2010 6:54am PDT
Valuation of an investment property or vacation home may be different than a standard market valuation approach for traditional residential real estate.
There are three primary approaches to real estate valuation: the market approach, the income approach and the cost approach. The market approach assesses the value of the property by reviewing sales of comparable properties in geographic proximity to the subject property. The cost approach considers the cost to construct a similar property. The income approach values the property for a given rate of return in light of the operating expenses associated with the property.
An investment property or vacation home that is rented when not being used by the owner, might be appropriately valued using the income approach to valuation as opposed to the more commonly used market approach used for residential properties. The income approach considers the gross rent the property generates and subtracts the operating expenses associated with the property. That "net operating income" is then divided by the rate of return an owner would expect to receive for such an investment. Therefore, a property that generates $32,000.00 in gross rent and has operating expenses of $12,000.00 has net operating income of $20,000.00. If the expected rate of return is 8%, the property value is $250,000.00. This may significantly different than the market approach valuation but may be a more accurate reflection of the value of the property if it is likely to be used as an investment property.