Have you been dreaming of building wealth through investing in commercial real estate and wondering how to evaluate properties. It can be very hard to determine value as it is rare to have two like properties to compare. Commercial real estate investing can be a lucrative way to build wealth. However, it's important to understand how to evaluate and value commercial properties before you make an investment.
There are a number of different methods that can be used to value commercial properties. Some of the most common methods include:
- Cap rate: The cap rate is a measure of the return on investment that a commercial property can provide. It is calculated by dividing the net operating income (NOI) by the purchase price. For example, if a property has an NOI of $100,000 and a purchase price of $1 million, the cap rate would be 10%.
- Gross rental multiplier: The gross rental multiplier (GRM) is a measure of the value of a property based on its gross rent. It is calculated by dividing the purchase price by the annual gross rent. For example, if a property has a purchase price of $1 million and annual gross rent of $100,000, the GRM would be 10.
- Cost approach: The cost approach is a method of valuing a property based on its replacement cost. It is calculated by adding the cost of land, the cost of improvements, and the cost of financing.
- Sales comparison approach: The sales comparison approach is a method of valuing a property based on the sales prices of similar properties. It is calculated by comparing the features of the subject property to the features of similar properties that have recently sold.
- Gross income multiplier: The gross income multiplier (GM) is a measure of the value of a property based on its gross income. It is calculated by dividing the purchase price by the annual gross income. For example, if a property has a purchase price of $1 million and annual gross income of $100,000, the GM would be 10.
- Cost per door: The cost per door is a measure of the value of a property based on the number of rental units. It is calculated by dividing the purchase price by the number of rental units. For example, if a property has a purchase price of $1 million and 100 rental units, the cost per door would be $10,000.
The best method to value a commercial property will vary depending on the specific property and the market conditions. It's important to consult with a qualified appraiser to get an accurate valuation of a commercial property.
There are a number of factors to consider when evaluating a commercial property, including the location, the type of property, the current market conditions, and the potential for future growth.
One of the most important factors to consider is the location of the property. A property in a desirable location with a strong tenant base will be worth more than a property in a less desirable location. These properties typically demand a higher rental rate. However, you may find your self comparing a property in a less desirable location, but having the same return on investment due to a lower purchase price. It's also important to consider the potential for future growth. A property in an area with a growing population or economy will be worth more than a property in an area that is declining.
The type of property is also important. Office buildings, retail stores, and industrial properties all have different values. It's important to understand the value of the type of property you're interested in investing in.
The current market conditions also play a role in the value of a commercial property. If the market is hot, with more demand than supply, like it is currently in multi-family, prices will be higher. If there is less demand, like it is currently in office space prices may be lower as it presents a greater risk for losses.
Conclusion
Evaluating and valuing commercial properties can be a complex process. However, by understanding the factors that affect value and using the right valuation methods, you can make sound investment decisions. If you are interested in purchasing or selling commercial real estate please reach out to The Glover Team to start you on the path to a successful wealth building path.
