The potential future worth of a property or piece of real estate is determined by the amount of equity and cash flow generated by the property or piece of real estate; this is referred to as the investment value of the property or piece of real estate. Whereas market value is the value of property or piece of real estate at the time of acquisition. Both investment and market values will influence an investor’s purchase decisions. Being a residential real estate investor, it’s highly crucial to understand how legislation such as municipal bylaws and regulations, local residential tenancies and landlord rules impact the current and future value of the property.
When investors invest in residential rental property, they will often have several goals, like earning a decent return on initial investment when investing in real estate. To protect the investment by keeping the building in a state that would attract excellent tenants in the long-term in a competitive market. To boost the worth of the property by making improvements that will increase its market value. To evaluate the market value and future investment value of a real estate property, appraisers and investors can utilize a variety of investment valuation methodologies based on financial information and current market circumstances. But various local or provincial legislation and restrictions can directly impact the current and future value of the property. Here are a few examples of how they may be affected. However, they are not all-inclusive, as each state or municipality has its own set of planning and regulation standards to consider.
How Market Value of Property is impacted
Investors may be unable to charge a specific amount of rent if the municipal or provincial government has residential tenancy regulations that control rent increases and govern landlords’ and tenants’ rights. According to the current income-generating capacity, the market value of the investment property will be established. Rent increases if restrained for residential units like in Ontario; the property’s market value will be calculated based on the existing income-generating ability of the property. Additionally, the property’s investment value will also increase with the ability to raise the rent.
Let’s say an investor spends $1 million on a fourplex and then leases it out to tenants. Imagine he now increases each tenant’s rent on an annual basis, in accordance with local municipal laws, while keeping operating expenditures steady. In that case, his rental income from the same fourplex will increase over the course of several years. As a result, the property’s value will improve due to the increase in potential revenue generated by the property.
How Investment Value of Property is impacted
When buying a residential investment property, investors might face legislation that implies renovation limitations on the property. These regulations may stem from municipal bylaws or local residential or tenant rules imposed on renovations that require considerable repair and cause the tenant to vacate the properties. Restrictions on improvements on a property can hinder the property’s investment value. Suppose an investor is in the process of purchasing a residential investment property and intends to make major renovations to it to boost its investment value.
If that is the case, they will base their assessment of the property’s market value on the likelihood it will appreciate in the future after renovations. With this in mind, if they come across a property with remodelling limitations, they may not even consider it or may evaluate the property’s market value in question relatively lower than it would otherwise. Similarly, investors can expect a sizable return on their investment if the real estate market appreciates over time.
Even though the market value and investment value are distinct concepts with distinct definitions, both values substantially influence each other. And it’s fair to assert that they are inextricably linked, and both should be thoroughly assessed before investing in residential real estate.
