An investment rating of a

real estate Real estate is property consisting of land and the buildings on it, along with its natural resources such as crops, minerals or water; immovable property of this nature; an interest vested in this (also) an item of real property, (more general ...

property measures the property’s risk-adjusted returns, relative to a completely risk-free asset. Mathematically, a property’s investment rating is the return a risk-free asset would have to yield to be termed as good an investment as the property whose rating is being calculated. The underlying drivers for property ratings are the dividends (net

operating income In accounting and finance, earnings before interest and taxes (EBIT) is a measure of a firm's profit that includes all incomes and expenses (operating and non-operating) except interest expenses and income tax expenses. Operating income and ope ...

) and capital gains over a certain holding period, and their associated risks or variances. Similar to other financial ratings developed for

mutual fund A mutual fund is a professionally managed investment fund that pools money from many investors to purchase securities. The term is typically used in the United States, Canada, and India, while similar structures across the globe include the SICAV ...

s and stocks, it can be assumed that investors have constant relative risk aversion over the wealth derived from other sources and from their investments. For simplicity, it can also be assumed that the investment return is not correlated with other sources of wealth but represents 100% of the investor's wealth. A property’s investment rating is then a transformation of the risk-adjusted averaged return to a single number that conveys the property’s long-term potential to yield profits.

Home as an investment asset

Adam Smith wrote in

The Wealth of Nations ''An Inquiry into the Nature and Causes of the Wealth of Nations'', generally referred to by its shortened title ''The Wealth of Nations'', is the '' magnum opus'' of the Scottish economist and moral philosopher Adam Smith. First published in ...

over 200 years ago that "a dwelling-house, as such, contributes nothing to the revenue of its inhabitants". Th
Economist
has reported that most Americans were treating their homes as an investment till 2008. The traditional belief that

home ownership Owner-occupancy or home-ownership is a form of housing tenure in which a person, called the owner-occupier, owner-occupant, or home owner, owns the home in which they live. The home can be a house, such as a single-family house, an apartment, c ...

is a necessary milestone to acquiring wealth still holds. Not everyone considers their home as a long-term

Property investment Real estate investing involves the purchase, management and sale or rental of real estate for profit. Someone who actively or passively invests in real estate is called a real estate entrepreneur or a real estate investor. Some investors actively ...

asse

some believe they can get better returns in other asset

By owning a home to live in, the owner not only saves on rent but also benefits from any long-term price appreciation. And investors, those that buy a home to rent out, are in it primarily for financial gains, be it monthly cash flow income, long-term gain, or a combination of both. But, investors and live-in home owners alike should care for the net returns a home can yield, since it is, for most, the single largest investment they will ever make.

Rating evaluation

Objective evaluation of a property's intrinsic long-term "worth", requires a rating process as mature as the process for stocks and funds. Knowing a property's current

market price A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the ...

is necessary, but not sufficient, especially in uncertain times. There are hundreds of macro and micro factors that could potentially impact a property's financial returns, including price appreciation, ability to put it on rent, and vacancy,

fair market value The fair market value of property is the price at which it would change hands between a willing and informed buyer and seller. The term is used throughout the Internal Revenue Code, as well as in bankruptcy laws, in many state laws, and by sever ...

, mortgage, maintenance expenses,

property tax A property tax or millage rate is an ad valorem tax on the value of a property.In the OECD classification scheme, tax on property includes "taxes on immovable property or net wealth, taxes on the change of ownership of property through inhe ...

property management Property management is the operation, control, maintenance, and oversight of real estate and physical property. This can include residential, commercial, and land real estate. Management indicates the need for real estate to be cared for and monit ...

fee (if any), and

home insurance Home insurance, also commonly called homeowner's insurance (often abbreviated in the US real estate industry as HOI), is a type of property insurance that covers a private residence. It is an insurance policy that combines various personal insura ...

. Add on top attributes that span markets, housing, government, community, demographic and lifestyle parameters. A sound rating analysis should cover all aspects of location – national, state, metro, county, city, tracts down to neighborhoods and the property itself. One should be able to measure and factor in the inherent risk/volatility in all of these attributes to arrive at a measure that can be correlated to a financially sound decision on the next home purchase No one has a

crystal ball A crystal ball, also known as an orbuculum or crystal sphere, is a crystal or glass ball and common fortune-telling object. It is generally associated with the performance of clairvoyance and scrying in particular. In more recent times, the cry ...

, of course. So, any rating of this nature should be interpreted as a 'relative' measure, and used as a way to rank/compare homes for their relative investment potential. In other words, a highly rated home is likely to outperform a low-rated home. So, homes in the top quartile are most likely to outperform all other homes.

Advantages of real estate rating

*Investors **Locate best places to invest **Identify properties with the most value **Provide objective criteria to establishes the right price range **Compute rent income to expect **Project expected long-term cash flow and appreciation *Sellers and listing agents **Calculate best price for rapid sale **Help in expanding properties market to national buyers pool **Differentiate values of properties **Build confidence in the value of a transaction *Lenders **Establish collateral value (both current & future) of a property **Assess potential loss in a foreclosure **Simplify decision to either foreclose or modify a loan

Rating systems

InvestMarq.com CashflowScoreFinestExpert.com FE-Score
* Case–Shiller home price index *Morningstar for funds and stocks:
PaperFitch rating for residential mortgage backed securities
* S&P Ratings

S&P direct property fund ratings: forward-looking qualitative assessmentCountry investment ratings: Shows the countries where buy-to-let property earns the highest returns

Home as an investment asset

Rating evaluation

Advantages of real estate rating

Rating systems

References

See also