It isn’t easy to get accurate and reliable valuations of real estate. It is not easy to determine whether an investment in property has been profitable. Investors must monitor a variety of indicators to be able to assess the current state of their investment and make appropriate decisions. This article gives an overview of performance measurement in real estate.

Why is Performance Measurement Difficult?

It is simple to value liquid assets like stocks and bonds. It is easy to value liquid assets because they are listed at a specific price. The price is listed on an exchange and can be transacted at any time. Real estate is different! Real estate prices can be opaque, and it requires a lot of time and effort to uncover the capital and rental values. Only when a property is sold can its true value be realized.

All properties are unique since all properties are unique (i.e., Real estate investors must, therefore, use a number of different measures to determine the success of their investment. Below are some common methods that investors use to determine the success of their investment.

• Indices: Real estate indexes are a reliable way of measuring the growth experienced by investors. Real estate indexes are based on the price of property in a particular year. As the price changes, the index value will change dynamically. These indices are based on the rates of property in different neighborhoods, and they capture the changes to some degree. This index is produced by companies that specialize in these transactions. The data is, therefore, accurate and reliable. Indexes are one of the most efficient ways to calculate the growth or decrease in value of investments.
• Valuation: Investors can also find out how much their property is worth by contacting a professional appraiser. Professional appraisers are available in most countries to estimate the value of a property accurately. They provide owners with a report for a fee. This service comes with a cost. Professional investors can get a better deal when they have several properties valued. This is because economies of scale are at play. As proof of the increase in value, companies like Real Estate Investment Trusts and financial institutions attach certificates from these appraisers.
• Comparable Properties: The last but not least method to determine the value of an object is by comparing it to similar properties. This method is free and easy to use. The results are not accurate. The prices of the properties in the same region can vary widely. The price can be affected by factors such as the amenities in a house and its proximity to other services. Each property must be adjusted individually. The fees that are derived from this type of valuation are, therefore, inaccurate and can’t be used in any official capacity.

Take a Look at These Measures

If the investor intends to hold the property for a longer period and not liquidate it, they can use some of these metrics to understand the performance better.

• Equity appreciation: Capital appreciation is the main reason investors invest in real estate. The equity growth they have achieved by holding onto their property is the most important metric for such investors. These investors track their mortgage payments, which include interest and principal fees. They then compare the current market value to determine if the equity they have built is greater than what they paid to hold the home.
• Equity growth from cash flow: Cash flow is the main reason why some investors purchase property. The monthly interest expenses are deducted from the cash flow. Their equity growth is based on the balance. When this cash flow occurs month after month, it can lead to significant change over time. Many times, increasing rentals will ensure that the property generates a positive cash flow.
• Operating Ratio Investment in property is a game of long-term. Over time, both the positive cash flow generated and the operating costs of maintaining a property change. This is why many investors keep an eye on this ratio to determine the success of their investment.

It has led to the belief in India that the real estate market must be in a bubble. The developers and buyers are currently waiting and watching a standoff. Both parties hope that the other party will relent. But neither side has conceded in the last five years! The answer to the question of how long this standoff can last will come with time.

Some cities in China have seen their property prices fall, while others have stagnated. According to the current market sentiment, China’s real estate prices are about to undergo a major correction.