Investment properties

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Author : Kristen

Depreciating cost or intrinsic value method

Calculating the intrinsic value of a real estate property goes back to finding an adjusted value of the originally constructed property, to which the value of the land is added. This involves determining the cubic volume (m3)of a buiding, which is them multiplied by its construction cost depending on the components and material used. This so-called "obsolete" depreciation is applied to the calculated value, and finally the value of the land on which the building has been erected is added. The land value depends primarily on location-related factors, the type of zone, occupancy rate and local parameters specific to each commune or canton. The same applies for acquisition costs, which include transfer duties, the creation of notes and other guarantees, cantonal and federal taxes, and notary acts that are not included in the intrinsic value but affect the profitabilits of the real estate investment.

To illustrate the depreciated cost or intrinsic value method, let's consider the example of a property constructed in 1905 and refurbished in 2004, situated on a plot of 1,586 m2 in a very good location and comprising 16 housing units on six floors complete with 16 parking spaces in adjacent boxes. To calculate this vale, the construction cost per cubic meter is used, which for this type of work is estimated at CHF 850 for housing units and CHF 375 for garages. A depreciation rate of 26% is takend into account with regard to the age of the property.

Housing units 7,220 m3 at CHF 850/m3 = CHF 6,137,000
Garages 1,056 m3 at CHF 375/m3 = + CHF 396,000
Reconstruction costs   CHF 6,533,000
Depreciation - 26% * CHF 6,533,000 = - CHF 1,698,580
Value of building   CHF 4,834,420
Land and improvements 1,586 m2 at CHF 1,250/m2 = + CHF 1,982,500
Financial costs of acquisition, taxes and unexpected charges   + CHF 681,692
Estimated value of the property   CHF 7,498,612

 

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