Saturday Brain Storming Thought (144) 18/12/2021
COMPILED BY ER. AVINASH KULKARNI
INVESTMENT VALUE
Investment value is the value of a property to a particular investor
Investment value is equal to market value for the investor who has the capacity to put the property to good use – it’s the highest and best use, its a most valuable use
Investment value is a concept that describes the value that an investor is willing to pay for the asset or investment based on his own objectives and parameters
Methods for Determination of Investment Value
1) Comparable Sales
The investor will compare similar properties per unit basis
2) Gross Rent Multiplier
By multiplying the gross rent a property produces in a year by the gross rent multiplier (GRM)
3) Cash on cash return
It is calculated by dividing the first years pro-forms cash by the total initial investment
4) Direct Capitalization
It involves capitalizing on the income stream of a property
5) Discounted Cash Flow (DCF)
It is used to calculate the net present value, the internal rate of return, and the capital accumulation comparison
Advantages of Investment value
1) investment value is not exclusive to the rich, regardless of your financial income, or your educational background
2) investment value makes the most of the compounding, ie when you reinvest the returns and dividends you earn, profit grow exponentially over time
3) investment value is the best path to stock market profits, ie investment strategy decides your profit or loss
4) less risk and volatility if you consider investment value
Disadvantages of Investment Value
1) requires in investors mindset, ie there is no room for emotions and elimination of fear and greed from your decision-making process
2) financial education is needed
3) hard work and patience is needed
4) study of past and projected revenue, earnings, debt, and cash flow is required
5) high fees, tax inefficiency, poor trade execution, and the potential for management abuses
Key takeaways of Investment Value
1) can be used when evaluating the value of an asset or entity
2) investment value usually refers to a broader range of values resulting from a variety of different valuation methodologies
3) investment value looks at the value of an asset-based on independent valuation methodology
4) it is more hypothetical in nature and generally will depend on the investment a buyer or seller is seeking to make
Assumptions made to decide Investment value depends upon
1) cash flow estimates
2) tax rates
3) financing capabilities
4) business strengths
5) value of intangibles
6) expected returns
7) synergies and more
Total Investment Value
Total investment value means, for any given period, the total of the aggregate book value of all of the company’s assets, including assets invested, directly or indirectly, in properties, before reserves for depreciation, bad debts or similar non-cash items
Investment Strategies
1) passive and active strategies
Passive – buying and holding not frequently to avoid higher transaction costs
Active – involves frequent buying and selling to gain more returns
2) Growth Investing
Short-term and long-term investments based on growth
3) Value investing
Decision-based on intrinsic value ie market goes for correction
4) Income investing
To focus on generating cash income like dividend or fixed interest income
5) Dividend growth investing
Consistently paying of dividend every year preference
6) Contrarian investing
Buying at down value and selling at high
7) Indexing
It allows investors to invest a small portion
Investment tips
1) set goals
2) research and trend analysis
3) portfolio optimization
4) best advisor/consultancy
5) risk tolerance
6) diversify risk
Investment value in mutual funds
Your investment details
Reasons of Investment
1) appreciation
2) cash flow
3) leverage
,4) tax benefits
Owner-occupied property
Property held for use in the production, supply of goods or services or for administrative purpose
Investment Property
It is held to earn rentals or for capital appreciation or for both
1) it is probable that the future economic benefits that are associated with the investment property will flow to the entity
2) the cost of the investment property can be measured reliably
Examples of Investment property
1) land held for long-term capital appreciation
2) land held for undetermined future use
3) building leased out under an operating lease
4) vacant building held to be leased out under an operating lease
5) property that is being constructed or developed for future use an investment property
Investment means the investing of money
Investment means the production of capital goods that are not consumed but instead used in future production
Terms used in investment value
1) Risk
Refers to loss of principal
2) Return
Refers to the expected rate of return
3) Safety
Refers to the protection on investor principal amount and expected rate of return
4) Liquidity
Refers to an investment-ready to convert into a cash position
5) Marketability
Means transferability or sale ability of an asset
6) Concealability
Means investment to be safe from social disorders, government confiscations, or unacceptable levels of taxation
7) Capital Growth
Recognizing in the connection between corporation and industry growth and very large capital growth
8) Purchasing power stability
Refers to the buying capacity of Investment in market
9) Stability of incomes
Refers to constant return from an investment
10) Tax benefits
Refers to plan an investment program without regard to one’s status may be costly to the investor
Need and Importance of Investment Value
1) longer life expectancy or planning for retirement
2) increasing rates of taxation
3) high-interest rates
4) high rate of inflation
5) larger incomes
6) availability of a complex number of investment outlets
Investment Value in Property
1) Tangible
Real property ie land, building, and personal property ie machine, equipment, jewelry etc
2) Intangible
Goodwill
Patent rights
Franchises
Trademark
Copyrights
Proprietary processes
3) Securities
Stocks and deposits
Factors affecting the selling price of a property
1) Demand
Willingness and ability of people to buy or rent a particular property
2) Offer
Analysis of real estate deals essentially involves competition
3) Property
Restrictions on use
Analysis environment – good location, convenient, environment
4) Analysis of field
Size, quality
5) Repairs
Means improvement to the property
6) Property management
Investors Motivation
1) ownership pride
2) personal control
3) self-use and occupancy
4) estate building
5) security of capital
6) high operating yield
7) leverage
8) tax shelter
9) capital appreciation
10) portfolio diversification
Investment disadvantages and risks
1) low liquidity
2) management cost
3) value depreciation
4) real estate cycles
5) government controls
6) legal complexity
Meaning of yield in investment value
1) describes the ratio of income to capital value
2) used to compare investments
3) derived from comparable properties that have already let and sold
4) often constant for similar types of property in a locality
