All value is relative. And that can cause issues when investing in Property. However, it can also be used to your benefit.
Below I will break down simple ways of assessing relative value and how with a bit of time & research, this will make you much better equipped to determine relative value.
First to assess relative value you need to know some basics about understanding the value of property, which we discussed in a previous post.
Now let's dig further into Relative Value.
What does it mean?
Relative value takes into account a property’s value based on that of similar properties.
A simple example of this is two apartments in the same building on the same floor with the same views and the same floor area. If one is priced much higher than the other, then, all things considered, the cheaper apartment is good relative value.
Another example would be to focus on the income side of the property and compare properties with similar incomes if both generate the same income, yet one is far more expensive than the other, then the more expensive one is offering less relative value.
Why is it important to know about relative value?
Say you have determined what, in the broad spectrum of the property you are looking for is good value. You can then focus more and compare on critical elements, and then determine which properties meet your desired outcome, which have the best value, and thus find a deal that others may have missed. It will also show you which properties on further investigation are relatively expensive.
Real world example:
Several years ago, I worked on a project that was priced disproportionally in favour of properties with desirable views over those with not so desirable views. For an investor looking for high rental yields, this created an opportunity to make use of relative value. The apartments with the more desirable views might rent for slightly more than those without, but not to the extent at which price they were selling. The buyer of the apartments with less desirable views could rent out his properties for cheaper than the ones with the desirable views while achieving a higher yield. He also had the benefit of being able to rent his properties faster as when the properties came to market, he was the best priced and had almost no vacant time.
In summary, relative value is comparing similar elements within properties to find your competitive edge or eliminate less competitive options.
I'd love to hear some other examples of where you found great relative value. Let me know in the comments below.