How To Value Commercial Real Estate? Four Ultimate Methods

by Earnests Drake Earnests Drake

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.

Property valuation for rental property – importance and benefits

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.