3 Methods to Help You Evaluate the Value of Commercial Real Estate
1 min read.
When investing in or leasing commercial real estate, a thorough evaluation of its value is essential. Making informed decisions based on reliable assessments can prevent costly mistakes. The three methods below will help you or your clients effectively evaluate the value of commercial real estate.
1.Direct Sales Comparison
The direct sales comparison method relies on up-to-date information regarding similar commercial properties listed for sale. Investors can assess the property's value by analyzing factors such as square footage, size, location, and year built. This method is commonly used for large or completely vacant properties. Comparative prices per square foot serve as the basis for evaluation, with adjustments made to account for varying aspects of each property.
2.Replacement Cost Method
In addition to the direct sales comparison approach, many investors also consider the replacement cost method to assess the value of commercial real estate. This method involves determining the cost of replacing the property with a similar one and evaluating construction costs, materials, and labour. For a comprehensive estimation, it is also advisable to include renovation costs in the calculation.
3.Capitalization Rate Method
Commercial real estate investments are primarily valued based on the income they generate for investors. The capitalization rate method involves calculating the anticipated cash-on-cash return if the property was purchased entirely in cash. Investors can gain insights into the investment's income potential and overall value by determining the capitalization rate.
Evaluating the value of commercial real estate requires a diligent examination using reliable methods. By leveraging these evaluation methods, investors can confidently make well-informed decisions and navigate the commercial real estate market.
Reference
Cauble, T. (2020, September 3). How is commercial real estate valued?. The Cauble Group. https://www.tylercauble.com/blog/how-commercial-real-estate-is-valued
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