How to Value Commercial Real Estate

When purchasing commercial real estate, it is important to know what the value of it is to ensure that the asking price is not more than what the property is worth. To calculate the value of the real estate, the one thing that is important to know is: how much does the property make? While there are other factors to consider such as age and demographics, the amount of profit is the single most important aspect in determining value.

Instructions

Value of Commercial Real Estate

1. Calculate the amount of money that it makes. To find the net operating income, find the difference between the total income brought in (rent, fees, etc.) and then subtract any expenditures from that total income. This number you calculate is the net operating income. This is pre-taxes, so it is not profit; however, it gives an idea on how much the property brings in.

2. Calculate the capitalization rate. To do this, divide the net operating income by the sale price (what they're asking for) or the fair market value (FMV). The FMV can be given to you by a real estate agent who specializes in commercial property. You'll get a percentage here and what is typically acceptable is 6 to 10 percent.

3. Divide the total net operating income by the capitalization rate. In other words, it would look like this: Value = Total Net Operating Income / capitalization rate. This gives a number amount for the value of the property.

4. Consider the demographics and economics of the area. If it is a rising area, the property might be worth more in the future, so paying more than the current value would make for a wise investment. This is because, while it might seem expensive now, it will be inexpensive in the future and that results in more profits.

5. Consider the age of the property. If it is a brand new property that was well constructed, it can sell for more. However, if the property is run down and is going to need even more money to make the property fully functional, this brings down the cost in the property.

References

• CAP Rate
• Calculating a CAP Rate
• Commercial Real Estate Property Listings