Investment value of real estate is a term that is confusing to both the professional valuer and the investor, and the reason is simple: the valuer is not the investor and vice versa. The valuer may not agree with your investment objectives, but that does not make you a poor investor, as you could be earning lots of money or saving lots of it from your real estate.
Unlike the market value, where forces of demand and supply are in play, the investment value is specific to you. Investment value according to you may therefore substantially differ from investment value according to the valuer or the valuer’s appointing institution.
In practice valuers, more often than not, return the same value for both market and investment value. The argument is that if the real estate is put up for sale, what it would bring is equated to its worth.
According to the International Valuation Standards, Investment Value is defined as:
“The value of a property to a particular investor, or class of investors, for identified investment objectives”
As an investor you determine your investment objectives. You may construct a bigger house in a predominantly owner occupier area where the rental market is not yet developed and make substantial saving on rent. You could also save a lot by locating near your work place or your children’s school. However, a group of savvy investors may not have a second look at your house, why? They would not be interested in what you save, the trees and lawn in your compound, or the satisfaction of having your own home, but in the rent the property would fetch in the market. They would therefore opt for a tiny apartment near the CBD.
Depending on your investment objectives, the investment value of your house to you can be higher than the market value or lower than the market value. All you need is to be honest with yourself and invest wisely.