There are several methods you can use to value a commercial real estate investment that you’re considering. The valuation you select is related to how you plan to use the investment. For instance, you might plan to build a new development, open a business on the property, rent the property/building out as office space, do property improvement for a fix-and-flip–or a combination of these, in order to get the most out of your RE investment. It’s often helpful to use more than one valuation method for new property investment.
Income Calculation for rental property valuation
Current Value = Net Operating Income / Cap Rate
The cap rate is based on local (neighborhood) average market sale price for comparable property, adjusted for attributes like a more (or less) appealing exterior or high-quality tenant base. However, this equation does not factor in all property details, like needed improvements.
Value Per Door Calculation
Asking Price / Number of Units = Value per Door
This offers a quick estimation of rental real estate value and a manner of comparing commercial real estate investment properties. Using this method, a 10-apartment complex with a price of $5 million has a per-door value of $500,000. A nearby similar property with 12 units should, by this logic, go for about $6 million. However, this doesn’t account for different sized apartments or other unique property details (higher or lower square footage in some units, or more/fewer bedrooms/baths, for example).
Cost Approach to Valuation
Construction Costs + Land Cost = Total Property Value
The cost method of property valuation is most accurate when the property’s intended use matches it’s the best to use. Depending upon the exact location and zoning of the land, the best use might be anything from rental property to oil drilling. This calculation provides a current property value based on local unique conditions. It is often used by banks or lending institutions to schedule the release of funds for each phase of a construction project during property development.
Using valuation calculations like these for commercial real estate will help you make the best possible property investment decisions.
When you need funding for commercial real estate investment, contact Rotay Capital Finance to learn about your options.
