How Much Is My Commercial Property Worth?
There are three methods of evaluating how much commercial property is worth. The three techniques include the income approach, the sales comparison approach, and the cost approach. Each of the three approaches of valuing commercial real estate offers distinct advantages and disadvantages. The ideal approach for your commercial property’s value will depend on the property’s type and location. Below are the three most commonly used methods of determining commercial property values.
Property Value (1) Income
The income approach, or income capitalization approach, is the most commonly used method of determining the value of commercial real estate. An evaluator determines the value of a commercial property based on a property’s income potential using its capitalization rate (cap rate). The cap rate is the ratio of a property’s income to market value. Market value is established through analyzing similar commercial real estate in the area. After understanding the market, an investor estimates the market value of his property by dividing its annual income by the cap rate. As a result, if a property’s annual income is $10,000, and the cap rate is 10%, then the property is valued at $100,000.
Property Value (2) Sales Comparison
The simplest of the three methods, the sales comparison approach is based on comparing similar nearby commercial properties. An investor gathers the sales prices o several comparable properties nearby and the averages all the sales prices. Using the square footage of the property under review, the evaluating property’s price is adjusted up or down based on its square footage in comparison to the compared local properties. A savvy evaluator further adjusts the price. An adjuster takes into account a variety of other factors including a buildings upgrades, age, and deferred maintenance.
Property Value (3) Cost
The cost approach requires a more complex analysis to determine an accurate commercial real estate valuation. First, one makes an estimate of the land value of a property. Second, the evaluator determines the cost of building an exact replica of the current building and then adds the land’s value. Finally, the evaluator subtracts any depreciated value of the building based on age. Typically, the newer a property is, the more reliable the cost approach is as an accurate estimate of a property’s value.
Accurately Determining What My Property Is Worth
For those new to commercial real estate brokerage and investment, it is essential you understand all three methods of property valuation. In doing so, you can better accurately determine your property’s value. Moreover, each methodology has distinct advantages and disadvantages. For example, methods like the cost approach are helpful when a property is located in more remote areas away from similar properties, and cap rates are inaccurate. Furthermore, the income approach is simple if you have accurate data or cap rates, but can be inaccurate in volatile commercial real estate markets. In such a case, the sales comparison approach would be the most ideal for determining a property’s worth.
* This is a brokerage opinion of value, not an appraisal. Information provided is an estimate only and can not be relied upon for certified value purposes.
