🏠 Property Valuation Methods Explained Simply

This guide has everything you need to know about property valuation methods.

If you’re new to real estate, I’ll explain each method in simple words and provide real-life examples.

When valuing a property, experts don’t guess. They use proven methods, each one tailored to a specific need.

If you’re a property professional, I’ll share advanced tips and strategies you can use to make more informed decisions.

Bottom line:

If you want to understand how professionals value properties (without the jargon), you’ll love this guide.

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🏘️ 1. Market Approach (Comparison Method)

What are similar homes selling for?
That’s the question behind the Market Approach (also known as the Comparison Method).

This method finds your property’s value by comparing it to similar properties that recently sold in the same area.

In simple terms: If three houses like mine sold for Rs. 1 crore, then mine might also be worth Rs. 1 crore.

But here’s the thing—no two properties are exactly alike. Even if they sit side by side, minor differences matter.

That’s why property valuers make adjustments. They add value for extra features. They subtract value for missing or poor ones.

Let’s look at a real example:

You want to value your house. It’s a 10 marla property, located in a popular area. A similar 10-marla house on the same street just sold for Rs. 1 crore. But your home has a lush garden, and the other doesn’t.

A garden adds value. So, the valuer may increase your estimated price by Rs. 5 lakh.

However, your kitchen is old and in need of repairs.

The other house had a newly renovated kitchen. The valuer might subtract Rs. 3 lakh.

After adjustments, your house might be valued at Rs. 1.02 crore.

What else do valuers check?

• Location: Is it near a school, market, or main road?
• Size: Total area in square feet or marla.
• View: Corner plots or park-facing homes often sell for more.
• Renovations, Such as new floors, paint, or bathrooms, can significantly boost a property’s value.
• Legal status: Any ownership or boundary disputes?

Why use this method?

It’s fast, it uses real, recent data, and most professionals trust it—banks, agents, and courts included.

Best for:

• Homes in developed areas
• Apartments
• Plots in housing societies

But remember:

This method needs recent sales data.

If your area has no recent deals or if your property is unique, this method may not be effective.

Still, it remains the go-to method for valuing most residential properties.

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💰 2. Income Approach (Investment Method)

This method is most effective for rental properties.

In short, it values the amount of money the property earns. If a shop earns Rs. 1 million annually, that income gives it value.

More rent? More value.

That’s the idea behind this method.

Here’s the basic formula:

Value = Net Annual Income ÷ Capitalisation Rate (Cap Rate)

Let’s break that down.

Say you own a small commercial building. It generates Rs. 2 million in rent annually.

The local cap rate is 8%.

Now apply the formula:

2,000,000 ÷ 0.08 = Rs. 2.5 crore

That’s the estimated value of your building.

But wait—what’s the cap rate?

It’s a percentage. It shows the expected return that an investor can expect.

You don’t guess it. You find it.

Check recent sales of similar rental properties in the area.

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Their cap rates become your guide.

Now, what is net income?

It’s not just rent.

You subtract expenses like taxes, insurance, repairs, and management costs.

Why do investors love this method?

Because it shows a return on investment, fast.

It helps buyers easily compare rental properties.

They can see which one gives better income for the price.

Best for:

• Shopping plazas
• Office buildings
• Rental apartment blocks

Quick tip:

Always check lease terms.

A long-term lease with a strong tenant gives more value.

It means a steady income.

And that provides peace of mind—and a higher property price.

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📉 3. Discounted Cash Flow (DCF) Method

This method is similar to the income approach, but more effective. Instead of looking at just one year’s income, it looks ahead. It values your future income today. Yes, today. Because money now is worth more than money later.

That’s why this method uses a discount.

Here’s how it works step by step:

First, forecast your cash flow. This means rent minus all costs, such as taxes, repairs, and insurance.

Second, choose a discount rate. Most people use 8% to 12%.

Third, calculate the present value of each year’s income. You bring future earnings back to today’s value.

Finally, add all those values together. That’s the property’s worth.

Let’s look at an example.

You own a small plaza. It earns Rs. 1 million every year for 10 years.

You pick a 10% discount rate.

Now, you calculate the value of Rs. 1 million each year using the discount rate.

Year one is worth more than year ten.

When you add them all, you get the total value.

That’s your DCF result.

Best for:

• Hotels
• Malls
• Properties with long leases and rising rents

Why use this method?

Because it considers the entire picture, not just one year.

It works well for properties that are expected to increase in income over time.

But be careful.

This method needs good forecasting.

If your rent estimate is incorrect, your entire valuation will be inaccurate.

So use it when you have solid data and sharp financial skills.

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🏗️ 4. Cost Approach (Depreciated Replacement Cost)

This method works in reverse.

You don’t start with the market.

Instead, you ask a simple question: “How much would it cost to build this property today?”

Once you get that number, you subtract depreciation.

Then, you add the land value.

That gives you the total worth.

Here’s the formula:

Value = Cost to Rebuild – Depreciation + Land Value

Let’s look at a real-life example.

Say it costs Rs. 5 crore to rebuild a hospital today.

The building is old, so depreciation is Rs. 1 crore.

The land alone is worth Rs. 50 lakh.

Now do the math:

Rs. 5 crore – Rs. 1 crore + Rs. 50 lakh = Rs. 4.5 crore.

What is depreciation?

It means things lose value over time.

There are three types:

• Physical depreciation: Pipes rust. Paint fades. Walls crack.
• Functional depreciation: The design feels old. Rooms are small. The layout is bad.
• External depreciation: The area gets noisy. Or a factory opens next door.

When should you use this method?

It’s great for special buildings.

Think of schools, hospitals, or factories.

Sometimes, there’s no sales data to compare. Or the building is one-of-a-kind.

That’s when the cost approach shines.

But be careful.

Always add land value separately.

Don’t forget hidden costs, such as demolition or legal fees.

These can change the final number.

In short:

This method provides a reliable estimate when no other method is applicable.

It works best when the building is unique, valuable, or can’t be compared.

🧱 5. Residual Method

This method is most beneficial to property developers.

They use it to determine the worth of a piece of land today based on its potential future value.

It’s a simple idea, but it needs careful planning.

Here’s how it works:

1. First, estimate the future sale price of the completed project.
2. Then subtract all construction costs.
3. Also, subtract the developer’s profit.
4. What’s left is called the residual value. That’s the land’s value today.

Let’s take an example.

A developer finds a plot of land.

After building a plaza, they expect to sell it for Rs. 10 crore.

Construction will cost Rs. 7 crore.

They also want a profit of Rs. 1 crore.

So, the leftover value is Rs. 2 crore.

That means the land is worth Rs. 2 crore today.

Pretty straightforward, right?

This method works well for:

• Empty plots
• Old buildings planned for redevelopment
• Projects with approved building designs

Now, why do developers love this method?

Because it tells them one key thing:

“Will I make a profit after buying and building?”

Before they even buy the land, they can verify if the deal is sensible.

However, here’s a big warning:

Costs change fast.

Material prices rise. Labour rates shift.

You can lose money if you incorrectly guess one of the numbers, such as the sale price or the construction cost.

So, always use the most recent market data.

Update your numbers often.

In short:

The residual method turns your future project into today’s land value.

But it works only when your math is solid, and your numbers are fresh.

🏨 6. Profits Method

Some buildings are hard to compare.

They don’t sell often. They don’t usually rent either.

You can’t use the market method or the income method here.

Examples include:

• Hotels
• Cinemas
• Schools
• Resorts
• Private hospitals

So what do you do?

You value the property based on the business it runs.

That’s why it’s called the Profits Method.

Here’s how it works—step by step:

1. First, find the total income the business makes.
2. Then subtract all running costs (like staff, electricity, and maintenance).
3. What’s left is the net profit.
4. This net profit estimate represents a fair rent that someone would pay to operate that business.
5. Then use a capitalisation rate (cap rate) to turn that rent into value.

Let’s look at an example:

A resort earns Rs. 50 lakh in net profit each year.

A fair rent for it might be Rs. 30 lakh.

Now, assume a cap rate of 10%.

Use the formula:

Value = Rent ÷ Cap Rate

So, Rs. 30 lakh ÷ 0.10 = Rs. 3 crore

That’s the value of the resort.

Why does this method work well?

Because the building’s value is linked to the business income, not just the walls or land.

But here’s something significant:

You need honest and accurate financial records.

If the profit numbers are wrong, the whole valuation will fail.

So, always check the books carefully.

In short:

This method values places that generate income through business, rather than rent or resale.

It’s useful, but only if your numbers tell the truth.

Final Words

Valuation isn’t a one-size-fits-all process.

The best method depends on several factors:

• The type of property you have.
• The purpose of the valuation.
• The data you can gather.
• The needs of the buyer or seller.

Here’s a quick guide:

• Use the Market Approach for homes and flats.
• Try the Income Approach for rental properties.
• Use the Cost or DCF Method for special or complex buildings.
• Apply the residual method to new projects.
• Choose the Profits. When the business controls the property

You’ve got one way to value it. However, here’s a smart move—don’t stop at just one method.

Pro Tip: Use at least two.

Why? Because it makes your valuation stronger. It builds trust, whether you’re dealing with a court case, a visa application, or a tax issue. Different methods give you a sharper, more dependable estimate.

Think of it like checking your math twice—you get a result you can stand behind.