How to Value Commercial Property

Estimating the value of a commercial real estate can be quite intricate compared to residential property as professionals use various methods for valuation. An exact value is essential to find deals other investors have bypassed and steer clear of investing in overpriced assets. 

In this competitive market knowing how to value commercial property is beneficial. Nailing down an accurate commercial real estate appraisal could give you the competitive edge needed to acquire a great deal.

Why CRE Valuation is Important

Real estate investments often hinge on the CRE investor’s calculated purchase price. Accurately pinpointing a commercial property’s fair market value is paramount for investors and lenders. And the ability to recognize potential opportunities that add different worth; moreover, they must assess if an asset fits strategically into their portfolio. 

For financial institutions allocating loans backed by real estate collateral, LTV is typically limited to around 70%. A lending institution will consider several elements when estimating property valuation to decide how much money should be loaned. Other factors that come into play are location, condition of the asset, in-place rents versus market-rate rents, income, expenses, and strategy, to name a few.

Factors Affecting the Value of Commercial Property

Before you can begin valuing commercial property, several factors must be considered. These include:

Location:

The location of your commercial property is one of the most important factors regarding its value. Factors like nearby amenities, access to public transportation, and proximity to other businesses will all affect the value of your property.

Economic Trends:

The current state of the economy and economic trends can significantly impact the future of commercial real estate and its value. For instance, an area that is expected to experience population growth or improvement in infrastructure may attract more businesses and, thus, increase the values of commercial properties in the vicinity.

Building Quality:

The quality of the commercial building itself is also a major factor when it comes to its value. Factors like age, condition, and size all affect the overall worth of a commercial property.

Demand for Space:

Certain types of businesses will always demand certain spaces in specific locations. For instance, a popular retail strip in a bustling city center may be worth more than an industrial warehouse located in a remote region.

Tenant Turnover:

Commercial properties with frequent tenant turnover will likely be less valuable than those with long-term tenants. This is because having reliable, long-term tenants indicates a steady income and thus increases the property’s value.

Ways to Determine the Value of Commercial Real Estate

Estimating the value of commercial properties can be much more sophisticated than ascertaining that of houses and smaller multifamily rental units. To make it easier for you, here are six unique valuation methods highlighted to assist you in accurately assessing the worthiness of your commercial real estate investments.

Sales Comparison Approach

This method compares your subject property to similar properties recently sold in the same area. This is done by looking at location, size, building quality, and tenancy factors. The sale prices of these comparable properties are then used to estimate the value of your commercial real estate investment.

Cost Approach

This method estimates the current replacement cost of your commercial property minus any depreciation. It considers factors such as labor, materials, and taxes to ascertain the estimated worth of your building.

Income Capitalization Approach

This approach considers the net operating income of your commercial property and other factors, such as vacancy rates, to calculate its fair value.

Cost Per Rentable Square Foot

This method divides the total cost of a building by the number of rentable square feet to calculate its approximate value.

Cost Per Door

Similar to the cost-per-rentable square foot approach, this technique assesses the value of a commercial property by dividing its total cost by the number of individual rental units in it.

Value Per Gross Rent Multiplier

This method divides the sale price of a commercial property by its gross annual rental income to estimate its worth.

These are just some ways to determine the value of your commercial real estate investments. Make sure to consider all the factors mentioned above, and consult with a professional appraiser or broker if you need

Evaluating Commercial Property Using the 2% Rule

The 2% Rule is a widely used formula for evaluating the profitability of a commercial real estate investment. It states that the gross rental income should be at least two times greater than the annual mortgage payment of the property.

For instance, if you are considering buying a commercial property at $200,000 with an annual mortgage payment of $10,000, the gross rental income should be at least $20,000 for the investment to be profitable.

This rule is a quick and easy way to determine whether a commercial real estate investment is worth pursuing. It helps you make an informed decision based on reliable data rather than solely on speculation.

However, it is important to note that the 2% Rule does not consider other factors such as operating costs, taxes, and insurance. Therefore, it should be used with more comprehensive calculations to estimate your investment’s return more accurately.

CRE Valuation Terms to Know

When it comes to evaluating commercial real estate, there are several terms that you should be familiar with. Knowing the lingo will help you make more informed decisions about your investments. Here are some of the most important CRE valuation terms to know:

Market Value: The price a willing seller would accept and a willing buyer would pay for a property, assuming neither party is forced to buy or sell.

Appraised Value: An estimation of a property’s worth given by an expert after studying its physical characteristics, economic conditions, and comparable sales data.

Adjusted Basis: The asset’s value is used to calculate depreciation and gain/loss when sold.

Assessed Value: The value placed on a property by the local tax assessor to determine taxes due.

Replacement Cost: The price it would cost to replace an asset with another one of comparable quality and utility at current market prices.

Knowing these terms will help you understand the commercial real estate valuation process and allow you to make more informed investment decisions.

Summary

You are now armed with the tools needed to assess any commercial property confidently.  By understanding the processes involved in valuing an opportunity is paramount and allows you to identify those opportunities that will allow you to reap great rewards.  Furthermore, by asking the right questions and doing the required research will ensure you have all the facts to make a knowledgeable decision, 

Here at Point Acquisitions, we specialize in commercial real estate investments for investors. Our team of experts can provide invaluable assistance with all your CRE investment needs. Contact us today to learn more about our services and how we can help you maximize the potential returns on your investments!