How to Estimate The Value of Commercial Buildings

Commercial property value

There are several good methods to find the approximate value of commercial property. If you are an investor looking for a return or a business owner buying your own building you should probably view the value in several ways.

Instructions

1. For the investor the best thing to look at is the income minus expenses. Total the rent rolls annual income. Subtract expenses like property tax, utilities and maintenance that you will be paying. Remember some expenses are paid by tenants. Each building is different so review the leases and expense reports any any information you can get.

2. Now that you have a net yearly amount the building will generate in income decide what return on your investment you will need to make the purchase worthwhile. Divide the annual return by the rate you need. To make it simple lets say the building generates $10,000 per month after expenses. That equals $120,000 yearly income. So if you need a 10% return divide $120,000 by 10% and the building is worth $1,200,000. If you only needed an 8% return then divide $120,000 by 8% and the building is worth $1,500,000. The reverse of that is if the building is for sale for $1,500,000 and you know it generates $120,000 annually you can divide $120,000 by the asking price of $1,500.000 and you get .08 so you know it would be an 8% return.

3. 

   The next basis to value a commercial building is by replacement value. What would the land cost and what would construction cost be for that type of building. Warehouse steel buildings are less expensive than brick. If you know any good commercial construction builders they will know off the top of their head rough cost per square foot. Currently in my area residential homes cost about $110 per square foot. Different heights and types of building will have different cost per square foot for new construction. If you know the approximate new cost then deduct deferred maintenance and any needed updating or repairs to make the existing building you are looking at comparable to new construction and you have a value to work with.

4. A third method and most accurate market value of a building is find 3 or more comparable buildings that have been sold in the last year. This is the method preferred by banks and financiers. They look at income but also need to know you are not paying more than other recent sales. The problem is there are not always comparable recently sold building close by. An appraiser adjusts for condition and size differences and you will need to do the same.

5. The last method is potential value. This is more speculative. It makes for bigger risk and bigger potential profit or loss. It deals with changing the value of a building. If a building is an old office and rents for $1,000 a month you may increase the value by making it a restaurant that would rent for $3,000 a month. To an investor you just tripled your value. If a free parking area could be made into a paying parking lot you added revenue and value. If you can remodel and raise the rent it will raise the value of the building. In short change the income and you change the value. The down size of that is if you buy a building with 4 tenants and 2 move out and cannot be replaced you have lost 1/2 your value as an investment. If you fill the spaces for 25% less rent you have decreased the current sales value by about that much unless a buyer has a way to raise rent or income again.