How To Value Commercial Real Estate? Four Ultimate Methods
Whether purchasing, borrowing, selling or leasing the commercial
property greatly depends on the appraised value. But assessing the value of the
property isn't simple.
Whether it is an apartment complex, retail shopping centre, or
owner-occupied structure, property valuation plays an important role.
Moreover, commercial real estate
valuation highly depends upon uncontrollable
elements like market price and maintenance cost. And, of course, how much a
buyer can pay. Therefore, there are four simple methods through which the
valuation of commercial real estate is evaluated.
Method to value commercial real estate
Cost Approach
The cost approach method considers-
·
Cost of rebuilding a property from scratch
·
The current value associated with the property
·
The construction material used
·
Other costs like replacements
This valuation method is typically considered when it is challenging to locate the appropriate comparables. It includes when the commercial property has notable improvements or added value while upgrading the structure.
Value of Gross rent multiplier
The gross rent multiplier (GRM) is a valuation method that
compares and measures the property's potential value. It is done by taking the
exact value of the commercial property and then dividing it by the gross income.
For example, if you have brought a commercial property worth $500,000 which generates a $70,000 Gross Rent annually, then the GRM is 7.14. This valuation formula is generally used to identify low-price commercial properties compared to their market potential income.
Value per door
This valuation method is typically used for determining the value
of apartment buildings instead of single-unit structures. With this method,
anyone can quickly determine the worth of the whole building based on the
present number of units within the system.
For example, if a building has 20 apartments of $4 million each, the overall cost will be $200,000 per door. It is non-dependable on the size of each unit within the building.
Cost per square foot
The rentable square foot combines the space occupied by the
tenants and the common areas where tenants can benefit, such as elevators and
stairwells. This method can quickly determine the value cost per square foot,
and the price is compared to the lease cost of square feet, which evaluates the
ultimate value of the building.
The value of every property is quite different. However,
commercial property valuation will have an unscientific component and subject. You’ll
find several investors for commercial real estate that will help you find the
best deal and the most attractive and effective method for your type of
transaction.
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