Hello,
Are there any good methods to assess or calculate the capitalisation on a given parcel of land for a newly built property prior it was constructed? Some says that undercapitalisation and overcapitalization can affect the final outcome in reaching the gains or rental returns. how?
say, the 450m2 lot is to be developed with single storey house of 180m2. In my understanding if the final cost will be higher then median price for the area for same type of dwelling then the property is overcapitalised. The confusion happens when a property is built cheaper then market price. The price can be lower just because of the building costs and not the case of cheap labor or material used.
Any magic formula or ratio?
thanks
Look at the purchase price of the old house, estimate the size, age & level of current maintenance/condition. Get your Rawlinsons out, work out what a similar house of the same size would cost (including landscaping etc), deduct x years of depreciation @2.5% and that would be close to the value of the land (roughly). Add back the cost to build the new house.
Thanks for this, will try and let you know about it.
I might missed something about depreciation.
The new house will be on depreciation schedule at 2.5% per year when built. How many I have to count?
suppose the old house in area 340K
my new house cost is 250K
the block of land is 150K
The above numbers are constants. using your formula I have the following:
250-(25 years x 2.5%)=93K
What does it mean in practical terms for me. Should I build that house on that land of 150K or need to look for different lot valued at 93K?
Regards
What you have interpreted is basically correct. If a new house (of the same quality & size as the existing house on the block of land) would cost $250k to build, the old house is about 25 years old, so would have 25 years of depreciation at 2.5% (about $156k),
So if the above is correct, then if the land is worth $150k, the existing (old) house about $93k – totalling $240k approx. Finding a run down house (for demolition & rebuild) at anything less than $240k can stack up. However you should research how much a new house in the area would sell for (it should be at least $150+$250+$93+gross profit) ie more than $500k (break even).
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