How to Determine the Value of a Commercial Property
3 methods you should know.
2.2 min read
There are many factors to consider when investing in commercial real estate— and the property's profitability is one of them. Commercial real estate valuations create a safeguard for investors who are looking to expand their portfolio, giving them a better idea of whether the property is a good fit or not.
One can use three standard methods to conduct a commercial real estate valuation to determine the economic value of a potential real estate investment—comparable, investment, and redevelopment.
Comparable Valuation
The most common of the three—the comparable valuation method— uses recent comparable sales transactions to determine the property's value. To calculate the property's potential value using this method, the average price per square foot is taken from recent comparable sales and multiplied by the building size to determine the suggested value of the property.
Investment Valuation
When taking the investment valuation approach, one must know the property's current expenses, the rental income and the market capitalization rate. To calculate the property's potential value using this method, the rental income is subtracted by the property expenses and then divided by the market capitalization rate.
Redevelopment Valuation
Also known as the residual land value, a redevelopment valuation involves running a proforma that provides the financial projections of the proposed development. This assessment is conducted to advise potential developers on the maximum they can pay for the property. To calculate the property's potential value using this method, the potential revenue must be subtracted from the construction costs and the potential profit.
Commercial property valuations help potential investors determine whether a property makes financial sense and is the right fit for their portfolio. Working alongside an experienced commercial real estate agent will give you the necessary knowledge to make smart investment decisions.
References
Bohn, T., & Corporation, P. R. E. (2022, May 9). How to calculate commercial property value. Frontline Real Estate Services LTD. Retrieved June 21, 2022, from https://flre.ca/insights/how-to-calculate-commercial-property-value/
Pinkasovitch, A. (2022, March 9). How to value real estate investment property. Investopedia. Retrieved June 21, 2022, from https://www.investopedia.com/articles/mortgages-real-estate/11/valuing-real-estate.asp
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