How To Find Out Commercial Property Value
Now we can use this market based cap rate to figure out a value for our property. So How Much is my Commercial Property Worth.
In this valuation approach the value of the commercial property depends on its potential income and its cap rate.
How to find out commercial property value. For instance properties that return a higher rate are perceived as having relatively lesser value than the propertys cost. It may seem complex at first and it is. In other words if you purchased a commercial property for 500000 and it generates 70000 in gross rents each year your GRM would be about 714 or 500000 70000.
The cap rate is defined as a propertys net annual rental income divided by the current value of the property. So how do you go about estimating the market value of a commercial property. Factors that influence the market value of commercial property include.
There are a lot of big assumptions that live inside this approach namely the cost of building materials and the assumption that nobody will ever pay. Based on our knowledge of the local market we might decide to simply average all three of these cap rates to get a market based cap rate of 833. An appraisal gives you that value baseline on which the lender determines how much debt it is willing to provide.
To calculate the value of a commercial property using the Gross Rent Multiplier approach to valuation simply multiply the Gross Rent Multiplier GRM by the gross rents of the property. For commercial property this can range between six and 12 per cent depending on the property type age and location. The appraiser will figure out an estimated cost of construction based on todays prices minus depreciation plus land and use this to come up with a measurement of the propertys value.
There you have it the correct way to figure out how much your commercial or multi-family property is worth. How to calculate the Gross Rent Multiplier. Lets say your comparable sold for 250000.
Trying to figure out how much an apartment building or other commercial property is worth. Simply divide your NOI by the Market Cap Rate and you get the value of your commercial property. To calculate its GRM we divide the sale price by the annual rental.
Its equal to income minus vacancy minus operating expenses. If it is a new-build property the value will be based on the expected annual income. Commercial properties earn rental income to the owners.
Owners and investors also care about commercial property value. The key is to apply the right approach to the particular property given the property type and its particular characteristics as they relate to the market. For example if a tract of land costs 40000 and the price of constructing a six-unit apartment house is 600000 the cost approach yields a value of 640000.
In commercial real estate most lenders want to see at least a 65 to 70 loan-to-value ratio before signing off on a mortgage. Sometimes called the Sales Comparison Approach or the Comparable Approach the Market Value Approach is quite arguably the simplest method to determine the value of a commercial real estate property. To calculate an assets total market value you essentially have to sum up the market value of the parcels land and building.
The cap rate method of valuing a property is where you determine what is a reasonable cap rate for the subject property by looking at other property sales then dividing that rate into the NOI for the property NOI is The Net Operating Income. Its equation is the net operating income divided by the cap rate. Youve determined that the propertys NOI after deducting applicable expenses is 50000.
Now divide that net operating income by the capitalization rate to get the current value result. The Gross Rent Multiplier GRM valuation method measures and compares a propertys potential valuation by taking the price of the property and dividing it by its gross income. At its simplest commercial real estate is valued based on a multiple of its income.
If our property has an NOI of 100000 then we can find its value like this. The final step is to then divide the NOI by the average yield rate the amount investors can hope to get as a return at the end of the year. This number is more of a categorization value.
Lets say a commercial property sold in the neighborhood youre looking at for 500000 with an annual income of 90000. Then follow these steps to find out the value of commercial property. Commercial Property Market Value Property market values are in place as a rough value of the current holding and selling price of an asset.
Cost Approach The cost approach for commercial real estate values the property as equal to the land price plus the cost of constructing the building from scratch. Determine the capitalization rate from a recent comparable sold property. Running the Numbers on Apartment Buildings and other Commercial Real Estate.
Information needed to perform this calculation includes the annual gross rental income multiplied by the number of years the buyer believes it will take to pay for the purchase. Use the Gross Rent Multiplier. The answer is there are three approaches to assigning value to commercial real estate.
The cost of the ownership at the time of purchase divided by the rentals made annually gives a percentage. The IRV Formula Income Rate Value. It is a more accurate and useful tool for determining commercial property values.
