How do I calculate the price of Equity?

Question

How do I know if the price of equity is overvalued or undervalued? Which ratios do I have to look at? Why?

Answer 1

Dear Danicassa:

I am not sure what you speak of. . .?

Equity is not a price. Equity in investing is the build up of your asset beyond the price YOU paid for it - or the loss you have incurred and therefore, lack of equity.

For instance, if you buy a home or property or make an investment for $100,000 and sell the property or home or investment for $200,000 you made $100,000 ABOVE what you paid or invested into it. You got your money, originally invested, back. . .PLUS you got $100,000 MORE. That is the asset growth, or Equity build up you have received.

If the home, property, or other investment goes down below the money you paid for it, there is no Equity at all. You have a loss on your money.

In making an investment on property or home or apartment buildings, etc., the price you are asked to pay should be the "Fair Market" price. This is found in COMPS and should be shown to you by the person/people you are investing through, or your Realtor. Carefully choose your Realtor ! It is calculated by the median or average price of a like-property or home or building , within a radius of several miles. What the average price of a like property has already sold for and is documented in COMPS. It shows what similar properties have been able to receive for it and that is the "rule" that is applied. YOUR investment should not be higher than what has been FAIR in that location. However, you might get a bargain! Again, it is called the Fair Market Value.

Within a fair market value price, the actual Equity build up for the person who sold the investment to YOU is unknown. It sometimes can be provided by a Seller or a realtor IF you ask to know what they made on the sale to YOU. But, they do not have to give this information. The COMPS shows you what is legitimate in that area for that type of investment. Also, Property Tax rolls show the value appraised by the City and what was paid for a property, I think. You could possibly look back into the rolls and see what the present owner has been assesed at. (MAYBE see what price they paid. Not certain.) These rolls are available to the public.

In a General Partnership where you invest for a SHARE of a building or complex, you evaluate against COMPS whether the Partnership is being asked to pay more or less for that area with similar properties. The Fair Market Value. You would need the number of investors in the Partnership to divide into the overall price and see that portion you are expected to pay. When you sell your share, you can calculate your portion of the Equity that will be ESTIMATED by the General Partnership for that neighborhood and similar properties within it. A Realtor is best used for that.

The expectation on what the property may gain in Equity over a period of time - like 5 years - and what you could expect to receive on your share is calculated by the factors of :

1. Growth of Income (this includes if the property has a history of being fully rented out ; or a calculation of vacancies and the amount of time of vacancy on your units per year. (Revenue loss has to be included - due to vacancy.)

2. Also, maintenance expenses, etc., including all expenses of upkeep through property management fees; gardening fees; Utility fees; and property taxes per year to be paid. Also Miscellaneous expenses like re-black topping the driveway or parking area. Window washing, painting, re-landscaping.

3. Also, the age of the building and what the age of the surrounding neighborhood is. As buildings get older - they are less in demand. Aging neighborhoods, receive less Equity build up - prices get held down by age - unless you invest in a prestigious neighborhood. Included is the amortization of the equipment in a building or complex. The Pool equipment, i.e., filter, pump, age of the pool and surrounding patio. (Concrete or brick work) ; air conditioning unit, etc.. All these items must be listed for a prospective investor and understood by YOU. Amortization is the price of the equipment and how it devalues as an asset over the years of service it gives to you. The equipments are part of your overall assets.

These types of lists and an amortized calculation can be appropriated from a bank or lender who is going to bankroll YOUR investment. They send out an Appraiser who will make up these lists and calculations. All together, you can never be absolutely certain of what your asset value will be at the time you cash in your investment, because of the unknown that sometimes occurs! Like a failing real estate market. A crashed market ! But you can get a ball-park figure from Appraisers, Realtors, or the General Partnership. You should demand to see their calculations and where the source of them came from.

I can not imagine what else you could look at. . .? If you learn of something else, please share the knowledge with ME in a Comment under your question. I would so appreciate knowing what exactly you are being taught?

Sincerely, Lana

Answer 2

Equity is simple. It's the marketable value minus the amount owed.
I have a house worth 250K I owe 150K the Equity is 100K Most banks will loan on equity for 80% of the equity.

Answer 3

Owners Equity= Cash+ Debt
I think.

Answer 4

ROE is derived via using taking the information superhighway earnings and dividing it via using the Stockholders fairness. The Stockholders fairness is have been given right here upon on the soundness sheet and the information superhighway earnings will look into the money bypass sheet.

Answer 5

Damn, Marshall Lee beat me to it.

He explained it as simple as I would have - if he hadn't got there first :-)