November 2, 2021

How to Find the Value of a Commercial Property

Understanding and Calculating Commercial Property Value

If you are in the market for a new commercial property, then you are likely considering a wide range of criteria for your next purchase. Not only do you need to consider the location and size of a commercial building, but you will also need to focus on the price point. Although there are many factors to consider, one is of particular importance: estimating the value.

When you are in the process of negotiating a commercial real estate deal, it is critical to be aware of the estimated value of the building that you intend to purchase. With that in mind, here are a few approaches you can take when estimating the value of a commercial building.

The Income Capitalization Method

This method of estimating the value of a commercial real estate building is perhaps the most popular option amongst investors. The income capitalization approach considers the income of the property to determine its value by utilizing the capitalization rate (otherwise known as the cap rate).

You can determine the cap rate of a commercial building by taking the property’s net income and dividing it by the current market value. This simple formula helps investors to easily determine a fair market value price. The income approach is a reasonable and formidable way to estimate the value of a property and is often used by both parties (the buyer and the seller) during the negotiation process.

Comparable Approach Method

If you are interested in a quick and simple way to determine a commercial property’s estimated value, then you should consider the comparable approach method. This approach is sometimes referred to as the market value approach, and it can be effortlessly carried out by either you or your commercial real estate agent.

In order to estimate value using this approach, you will need to run a search on comparable commercial properties that have sold in the local area within the last several weeks or months. You should only search for properties of similar size and include the same or similar features to your desired commercial building. Once you have completed this search, you can then consider the sales prices of each property to predict the worth of the commercial building you intend to purchase.

Despite the fact that this method is simple and easy to conduct, it tends to be less exact. This is because it determines the value based solely on the current commercial real estate market conditions – and this may not be sufficient information.

Value per Gross Rent Multiplier

When considering the valuation of a commercial property, one common method used is the Gross Rent Multiplier (GRM). This valuation method involves calculating the value of a commercial property based on its gross rental income and is particularly useful for properties that are primarily generating income through rental leases.

The GRM is calculated by dividing the purchase price of the property by the gross income it generates. This method takes into account the square footage of the property and can be used to determine the fair market value of commercial properties in the area.

One important factor to consider when using the Gross Rent Multiplier method is the accuracy of the rental income data. It is essential to ensure that the rental income figures used in the calculation are accurate and up-to-date to get an accurate valuation of the property.

Another factor to consider is that the GRM method does not take into account the expenses associated with owning and operating the property, such as property taxes, maintenance costs, and utilities. Therefore, it is crucial to factor these expenses into the overall financial analysis of the property to get a more realistic picture of its value.

Additionally, the GRM method may not be suitable for all types of commercial properties, such as vacant properties or those with unstable rental income. In these cases, other valuation methods, such as the discounted cash flow analysis or comparable sales approach, may be more appropriate.

Overall, while the Gross Rent Multiplier method is a useful tool for quickly estimating the value of a commercial property based on its rental income, it is essential to consider its limitations and use it in conjunction with other valuation methods to get a comprehensive understanding of the property’s value.

Cost per Rentable Square Foot

One key metric used in property valuation is the price per square foot or cost per rentable square foot. This metric is calculated by dividing the selling price of a commercial property by its total rentable square footage. The sales comparison approach is often used to determine the value of a commercial property by comparing it to similar properties in the market. A commercial appraisal takes into consideration the net operating income of the property, the current value of the land, and the property type when calculating the commercial property value.

Ultimately, property valuation is a complex process that involves analyzing a variety of factors to determine the fair market value of a commercial property. It is important for property owners, investors, and lenders to carefully consider all of these metrics and factors when making decisions about buying, selling, or financing commercial real estate.</

Cost Approach

The cost approach is preferred by commercial real estate investors who are looking for a more exact estimate of a property’s value. However, it can be complicated as it involves a bit of math.

Sometimes referred to as the replacement cost approach, this method requires you to begin by determining only the value of the land in which the property is located. Then, you must decide how much it would cost to build the existing commercial property on that piece of land and combine this with the land value. Finally, the property value is determined after depreciation costs have been deducted from the estimation.

No matter which approach you elect to use for your next commercial real estate deal, it’s important to carefully consider the value of the property you intend to purchase before making an offer. The current value, as well as the predicted future value, can impact your offer price significantly (either by reducing or raising it). For more information about purchasing commercial real estate, contact Rakow Commercial Realty Group today.