evaluation of real estate investment projects

Evaluation of real estate investment projects

What is an investment project?

The opportunity to invest in some project seeks a future economic benefit or a solution to a problem of the company or an individual, this type of project is one in which an injection of resources is necessary to be completed.

Constructing a building in order to use it as warehouses, as offices, or as a new branch for the organization entails an impact beyond the economic, also in the environmental, legal and social aspects, for which evaluating its feasibility is essential. not settle for a GO positive, but to know what consequences the project could have, in the place where it is going to be built, in the surrounding community, in the environment and also if it complies with current legal regulations.

Since this requires the allocation of resources, they normally need to undergo processes of assessment that determine various benefits such as: cost effectiveness, risk margin, among others.

The sources of financing for an investment project are:

Investors: These characters are updated since they are actively in the financial market. 

Banks: If the company has a correct credit history that is also constantly increasing, these institutions can grant a loan to obtain a property or real estate. 

Owners: The owner of the company or some private person may be the one that absorbs the expenses of acquiring a new property or property, for any intended use. 

Types of investment projects

In order to understand and evaluate them in a better way, these projects can be valued according to the source or origin of the investment.

  • Public investment projects: Which are carried out with resources from treasury funds in a public way, by the government, destined to some work or destination for the entire population. 
  • Infrastructure projects: Public works in order to be used in social activities, such as airports, hospitals, sports and educational centers, ports, etc. 
  • Innovation projects and development of organizations: They are usually promoted by the state to encourage development in companies.
  • Environmental projects: To take care of the environment such as the recovery, restoration or remodeling of green areas, the care of protected areas, etc. 
  • Expansive projects: Where it is sought to enter new markets with the brand or organization, they usually entail high expenses, for which reason an in-depth analysis must be carried out.
  • Innovational projects: Where new technology is sought to be applied, for example, AI or BIG DATA. 
  • Mixed investment projects: Public, governmental and private investment.

Investment project evaluation methods

  • Financial feasibility analysis
  • Sales projection
  • Costs and margins
  • initial investment
  • marginal contribution
  • Internal rate of return of the project VS internal rate of return of the Investors
  • Breakeven 
  • return point 

What is the evaluation of real estate investment projects?

Its purpose is to measure the profitability of a real estate project, through an evaluation line, which allows us to obtain a more objective view regarding the decision to invest or not, determining if this project can be successful in the long term. 

Always is It is advisable to invest in projects in which the current value of projected income is greater than the current value of the costs necessary to produce said income., so investing in a property is only for those seeking to generate solid income with less risk than other businesses, although we keep in mind that no project guarantees a 0% risk. 

What data must be considered to calculate the return on investment?

These are some of the data necessary to take into account when attempting to carry out a investment return evaluation, they all generate an expense and it is necessary to consider it to verify if it is greater or less than the benefits it can provide us.  

  • The sale value of said property 
  • The furniture
  • Register
  • Community expenses 
  • The payment of basic services such as electricity, water, internet, drainage, etc. 
  • Expenses in maintenance and repairs 
  • The installations
  • Mortgage loan interest rate  
  • Notary fees 
  • taxes 
  • Some insurance related to the property
  • loan term
  • Mortgage Loan Financing Percentage 
  • Control of the property

What are the stages for evaluating investment projects?

There are 5 stages through which the evaluation of a project, not only talking about financial and economic indicators, goes much further than this, since qualitative factors are also relevant, which is why we are going to explain the stages.

  1. Define the investment project: Here we analyze what risks and what benefits this project can bring to the company or individual, if it is possibly the solution to any problem or, on the contrary, it will bring us more problems. 
  2. Market study: As in any project it is necessary to evaluate the demand, the forecasts and how we can use the property in question to obtain greater profitability, for this the study is necessary. 
  3. Analysis of the property and process of profitability or use: For this stage, it is necessary to take into account the previously mentioned variables of return on investment, since we must study and assess the physical characteristics of the property in question, the use that it is intended to give, if it causes a benefit or a major problem. 
  4. Economic parameters: For this stage, the investment that is considered to be allocated must be determined, as well as the costs that it will generate. After obtaining this information, make a flow chart where the funds will be established for the useful life of the investment, it is necessary to consider that It depends on market movements, this can affect or benefit this turn and that there are economic indicators such as IRR and Payback that must be taken into account. 
  5. Comparison of results and analysis of the project: In this last step after estimating the costs, profitability, characteristics, etc. We can compare the data obtained with the expectations and goals.

Types of Capital Investment Projects

Project Type Description
New products or marketsFor any of these two aspects, it is necessary to invest extra capital for costs and expenses, expansion, new buildings, plants, etc. 
Expansion of existing products or markets It means an expansion of the business, after a detailed financial analysis, the amount to be invested and all the characteristics of the expansion can be established.
replacement projectIt consists of financing the replacement of a part or good of the company with a new one designed to do the same job or be used as the previous one.
Replacement project to reduce costs Sometimes, companies need to replace some projects with others to reduce costs, replacing old equipment, furniture or goods with new ones. 

How is a property valued?

Real estate appraisals are the easiest and safest way to obtain the fair and real value of a property, supported by various factors related to the quality of life that said property offers.

With this study, a document is obtained that has legal validity, necessary to carry out various procedures related to the property. 

Real estate appraisals are carried out by a expert appraiser, who is an expert who has a professional license issued by the SEP, which certifies him as a property appraiser. 

it's possible value from a house, to agricultural land, industrial warehouses, parking lots and warehouses or offices.  

When you intend to venture into a real estate investment project, it is very important to take into account the risks that this entails, for which it is advisable to go with an advisor or company dedicated to carrying out this type of evaluation. Anepsa offers said service adapted 100% to your company. , for know more about it contact to one of our advisers. 

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