How to Value a Comercial Property
When you are contemplating the purchase of commercial real estate property, you want to estimate how much the property is worth when deciding how much you will offer. There are three different ways to value a commercial property.
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Things You'll Need
- Total income
- Total expenses
- Vacancy rate
- Loan percentage
- Recent comparable sales
Instructions
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Replacement Cost Method
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1
Determine the cost of replacing the entire building at today's construction rates.
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2
Determine the value of the land, by itself, as if no building were present.
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3
Estimate the total depreciation for the building, from when it was first built until today.
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4
Add the cost of replacing the building and the value of the land together. Subtract the total depreciation. This is the estimated value of the property using the Replacement Cost Method.
Capitalization Method
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5
Determine the property's total annual income, total annual expenses, and vacancy rate. Income includes, for example, rent for all units, laundry/vending machines income, and parking fees, but does not include any loan payments on the purchase of the property. Annual expenses include, for example, property taxes, insurance, landscaping, and maintenance.
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6
Discount the property's total annual income by the vacancy rate. If the vacancy rate is 5 percent, for example, the discounted annual income is 100 percent - 5 percent = 95% of the total annual income. Subtract the total annual expenses from the discounted annual income. This is the property's net income.
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7
Determine the interest rate you expect to pay for money borrowed to purchase the property, and the rate of return you desire for cash you will invest to purchase the property. Estimate the percentage of money borrowed versus invested.
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8
Compute the capitalization rate by weighting the interest rate and rate of return by their respective percentages and adding the result together. For example, 8% interest X 75% = 6%, plus 10% return X 25% = 2.5%, so the capitalization rate = 8.5%.
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9
Divide the net income by the capitalization rate. This is the estimate of the property's value using the Capitalization Method.
Market Value Method
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10
Collect the sales price for at least three commercial properties that are similar in size and condition, and which are located in the same or a comparable area.
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11
Compute the average of the sales prices collected. This is a simple estimate of the property's value using the Market Value Method.
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12
Assign a percentage which represents your judgment of how comparable each property is to the property in question. Multiply that percentage times the sales price for each property and compute the average, also called a weighted average. This is another estimate of the property value using the Market Value Method, which incorporates your judgment about the data used in the calculation.
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References
- Photo Credit building image by peter Hires Images from Fotolia.com
