The Science of Commercial Property Value Calculation
Although several scientific valuation methods exist to determine commercial property value, valuing commercial property well is an art form. Regardless of the value you believe a property holds, commercial property value is driven by market supply and demand and comparable property values at the time of purchase or sale.
Understanding how property value is calculated in different markets and the way sellers arrive at their list price will help you feel confident with your purchase, investment, or sales potential.
At Done Deal Real Estate Investments, we want you to feel confident and comfortable in your investment dealings. We are happy to answer your questions and help you understand the investment market.
Call the Palm Springs real estate investment professionals at Done Deal Real Estate Investments for expert investment assistance and opportunities.
What Affects Commercial Property Value?
- Sales Comparison- sales of similar properties in the same market create “comps” which influence the value of properties that surround them These are sales comparison properties.
- Capitalization Rates- A commercial property’s “cap rate” is the return on investment that investors can expect if they purchase the property in all cash. The cap rate is calculated by dividing the property’s Net Operating Income, or NOI, by the current value or the proposed purchase price. (These are often determined based on recent comparable property sales.
- Net Operating Income- This is the property’s gross rental income minus the operating costs.
- Replacement Costs- The replacement cost is what it would cost to replace a property, meaning the cost of the risk of an older or existing property being replaced by a new, technologically advanced property.
- Market Condition- Market conditions drive rental rates, which in turn drive up the value of the property or drive down the value of the property.
- Utility Value- The more useful the property is, the higher the demand for that property. This is value based on a good location and high or low community value for that property.
- Supply and Demand- Rental rates are determined by how much of A supply there is, the available options, and how high or low the demand is. This will affect the value positively or negatively at the time of purchase.
- Transferability- If a specific property in a specific market has high demand, it will be easier to sell, or transfer, than a property that has a low or no demand. Ease of selling equates to ease of transferability.
4 Ways to Calculate Commercial Property Value
- Replacement Cost Approach: This approach to property value is based on what it would cost to build a similar property from the ground up. It can be calculated or estimated using the equation: Property Value= Replacement Cost-Depreciation=Land Value
- Income Approach: This is also called the Direct Capitalization Approach, wherein the value is derived using the equation: Property Value= Net Operating Income/Cap Rate.
- Sales Comparison Approach: This property valuation approach uses recent sales of nearby comparable properties in the same market to estimate a sales price range. This will be based on the size, condition, location, and amenities of similar properties.
- GRM Approach: The GRM approach, or Gross Rent Multiplier approach to property value uses the equation: Property Sales Price or Value/Annual Gross Rental Income.
Commercial Real Estate Investing in Palm Springs
Understanding the general terms and calculations in real estate investing will help you make good decisions with your money and see great ROI in the future. Let the Palm Springs real estate experts at Done Deal Real Estate Investments help you reap the benefits of smart investing and never miss out on a property opportunity.
