As a newcomer to commercial real estate investing, it can be difficult to comprehend how property values are calculated. Here are some tips to help you get started. There are a number of alternative techniques available, each with its own set of advantages and disadvantages to consider. Some valuation methods are useful for performing a rapid examination of a property when evaluating potential investments, but other valuation methods are reliable when determining a reasonable asking price for a property.
Some of the most commonly used methods of commercial property valuation will be discussed in this article, along with some of the phrases that are most frequently used in this area of finance. With this knowledge, you'll be better prepared to examine your own investment opportunities and comprehend how funds make selections about which properties to include in their portfolios. Let's get this party started!
Method 1 we'll look at the Income Capitalization method.
The Income Capitalization method of establishing property value in commercial real estate transactions is the most often utilized way of evaluating property value in commercial real estate transactions. The income from the property is estimated using the capitalization rate, which is commonly referred to as the "cap rate" in this approach of valuing real estate.
The cap rate is calculated by dividing the net operational income of the property by the property's current market value (or sales price). A property with $500,000 in Net Operating Income (or NOI), for example, would have its value reduced by the cap rate (9 percent) to arrive at a value of $5,555,556, according to this formula.
Method 2 Referred to as the Replacement Cost Approach
This method, which is referred to as the Cost Approach, is a more sophisticated way to assess the value of commercial real estate than the other methods.
First and foremost, the value of the ground on which a building is situated is determined. Following that, the land value is increased by the price of constructing an exact replica of the current structure.
Following that, the depreciation factor is calculated and applied to the combined figures in order to arrive at the final value.
Method 3 Market-Based Approach
The Market Value Approach to property valuation, also known as the Sales Comparison Approach or the Comparable Approach, is the most straightforward method of establishing the value of a piece of commercial real estate. It is also the most widely used method.
First, market research is conducted to determine a range of values for properties that are similar in usage and size to the subject property and have recently sold in the nearby region. Following that, the value is changed in accordance with the physical qualities of the item under consideration.
On the surface, this approach of valuation is concerned with determining the amount of money that a buyer is most likely willing to pay in the current market climate.
Method 4 (Income Capitalization Approach) is the fourth method.
An investor's expectation of income from a specific piece of real estate is used in this way of determining the value of a piece of property under this method. It is customary to calculate the income number in part by comparing it to the income of other similar nearby properties, as well as any anticipated changes in maintenance expenditures.
In order to estimate the price of a property, the predicted income amount is discounted to the present value based on the fact that it is a future-oriented prediction.
Method 5 Value Per Gross Rent Multiplier (also known as the Value Per Gross Rent Multiplier).
The Gross Rent Multiplier (GRM) valuation method assists in determining the value of a commercial property by taking the cost of the property and dividing it by the gross income generated by that business. This approach of determining commercial real estate valuations is typically used to identify properties that are undervalued in relation to the amount of revenue they could generate for a potential investor.
The GRM of a commercial property, for example, would be around 6.67 ($400,000 / $60,000) if you purchased it for $400,000 and it generated $60,000 in gross rental revenue each year.
Method 6 Value Per Door (also known as Value Per Door
The value per door technique of valuing commercial real estate is more commonly utilized for apartment complexes rather than single-family homes. In essence, the value per door technique assesses the overall value of a property depending on the number of units in the building.
For example, an apartment building with 40 flats priced at $4 million would be valued at $100,000 per door, regardless of the size or amenities of the individual units within the structure. Because it does not take into consideration the many characteristics of each rental unit, this is a rather rudimentary way for getting quick estimates of value.
Method 7 Cost per rentable square foot is a cost per rentable square foot calculation.
If you use the cost per rentable square foot valuation method, the size of the entire property is used to determine value. This includes not only the square footage of the rental units, but also the square footage of common areas such as stairwells, elevators, courtyards, and exercise rooms, among others.
A comprehensive examination of the property's value begins with determining the total rentable square footage. The total rentable square footage is used to calculate cost per rentable square foot, which can then be compared to the average lease cost per square foot for a comprehensive examination of the property's value.
In the case of a property with 20,000 rentable square feet and an average cost to rent per square foot of $11 per square foot yearly, a sales price of $2.8 million would result in roughly an 8% gross rental yield on the property's rentable square footage. If you know that the property will provide $13 per square foot in annual rental income, a value of $3.3 million will still result in the same gross return rate as a valuation of $1 million.
Investing in Commercial Real Estate Funds Produces Regular, Regular Income
Commercial real estate funds are a fantastic choice if you are looking for a long-term passive income source. Commercial real estate funds from Saint Investment Group provide reliable income streams with fewer risks than the stock market and less negative risk than individual property acquisitions.
Get in touch with one of the specialists at Saint Investment Group to learn more about commercial real estate investment and diversification. Investing in commercial real estate is a long-term investment, and we take the time to properly examine each property before putting it in our funds. Get in touch with Saint Investment Group as soon as possible.
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