Market v Investment Value. You're Not Overpriced; We're Not Lowballing

Commercial Real Estate Agent with Next Wave RE Investments LLC Bullhead City AZ Commercial RE Broker AZ BR 528507000

Market Value v Investment Value. You're Not Overpriced; We're Not Lowballing

A valued colleague came to me with a question:

"My investor-client wants to purchase a home to rent out. He asked me 'what the rate of return is'. How do I figure that out? Is that the IRV formula?"

Well, yes, no, and wait.

Why is your client asking YOU what HIS yield is? He should be TELLING YOU his required yield!

This is a red flag, indicating that your 'investor' is really . . . not.

Measures of investment performance depend on many factors, not the least of which is property type and use.

You may not want to use the IRV formula (which calculates Cap Rate) to value a single family home used for rental. I wouldn't.

Cap rate determines the value of a property at a given moment in time. It's more useful in comparing the risk factor of several potential investments TODAY than measuring performance over time.

Your 'investor' needs to be thinking in terms of their initial investment, the property's annual net cash flows and its projected sale proceeds at the end of the holding period. 

Internal Rate of Return (IRR) and Net Present Value (NPV) are useful in figuring out how each dollar you spend on an investment will work for you over your holding period.

Those are measures of INVESTMENT VALUE.



**Don't confuse Investment Value with Market Value.**

In many markets, it's literally a universe apart.


Investment value is unique to the investor,  based on factors such as the investor’s individual requirements, investment alternatives, tax rate, and ability to finance the property. 

So when you get an insultingly low offer on your single family home in an appreciating area of a hot market, don't get too upset.

I mean, you can roll your eyes, but consider the possible source of confusion.

And feel sorry for the hapless buyer's agent who did not dialogue with their 'investor' about whether they need to be buying at another time or in another place when/where they can get THEIR deal, instead of wasting time on a seller who will get THEIR deal from a non-investor buyer. 


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Ron and Alexandra Seigel
Napa Consultants - Carpinteria, CA
Luxury Real Estate Branding, Marketing & Strategy


Great explanation of Investment Value!  I love that mindset, which has definitely shaped our mindset and way of thinking.  A

May 24, 2018 09:48 AM #1
Chris Ann Cleland
Long and Foster REALTORS®, Gainesville, VA - Bristow, VA
Associate Broker, Bristow, VA

Working with investors is not the same animal as someone looking for a place to call home.  And just because someone thinks they are a saavy investor, doesn't mean they are.  The desire to invest and the know how to do it must both be present, not just the desire. 

May 24, 2018 11:54 AM #2
Debb Janes EcoBroker and Bernie Stea JD
ViewHomes of Clark County - Nature As Neighbors - Camas, WA
REALTORS® in Clark County, WA

Marvelous explanation - and no doubt the reason you are the one to hire in your market for this niche segment of real estate.  If you are looking for investment properties - the best agent to hire is one who knows what she's talking about - you, of course. And, just as all agents are not the same, all investors are not the same. 

May 24, 2018 12:04 PM #3
Chris Ann Cleland
Long and Foster REALTORS®, Gainesville, VA - Bristow, VA
Associate Broker, Bristow, VA

Featured in the group;  BARTENDER, MAKE IT A DOUBLE.

May 24, 2018 12:39 PM #4
Bob "RealMan" Timm
Ward County Notary Services - Minot, ND
Owner of Ward Co. Notary Services, retired Realtor

Well said Candice A. Donofrio . I do not work with investors very often so I really appreciate tidbits like this.

May 24, 2018 01:30 PM #5
Allie Angeloni
Long Realty - Oro Valley, AZ

Great Blog Candice A. Donofrio - as always, I learn from you.  Good explanation and easy to understand!

May 24, 2018 03:35 PM #6
John Wiley
Fort Myers, FL
Lee County, FL, ECO Broker, GRI, SRES,GREEN,PSA

I am glad you wrote this article. It points out that when we listen, we may find that the consumer does not have their facts straight and are set up to make unwise decisions.

Also, this points out that as agents we must be careful to not go beyond our area of expertise.

May 25, 2018 08:33 AM #7
Georgie Hunter R(S) 58089
Hawai'i Life Real Estate Brokers - Haiku, HI
Maui Real Estate sales and lifestyle info

Good explanation.  Many buyers might consider themselves to be investors, but really they are just buying another home.

Jun 20, 2018 06:53 PM #8
Candice A. Donofrio
Next Wave RE Investments LLC Bullhead City AZ Commercial RE Broker - Fort Mohave, AZ
928-201-4BHC (4242) call/text

Praful Thakkar you should read this especially with regard to when and when not to use CAP rate!

Jul 09, 2018 11:30 AM #9
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Candice A. Donofrio

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