As a property investor, commercial real estate can be a great way for you to grow your portfolio and increase your income.
With that in mind, you'll only achieve your investment goals if you're investing in commercial properties that you can make a good income from. Whether buying, selling, or renting a property, knowing how much it's worth is vital if you want to maximize your profits.
In this guide, we'll look at the most common commercial property valuation methods so you can get a better idea of how to make the right investment decisions. Keep reading for more.
Sales Comparison Approach
This method looks at data on recent sales. By comparing the prices that similar properties have recently sold for, you can get a better idea of how much the one you're looking at is truly worth.
For this, the comparison needs to encompass factors like property size, functionality, and location. This can be difficult depending on market conditions or if there aren't many similar properties in the area. A professional property manager can help you do this effectively.
Cost Approach
This is an approach that looks at how much it would cost to rebuild a property exactly as it is including the labor, materials, and land. This is typically done when there aren't enough similar buildings to compare. If it would cost less to build the property from scratch, that may be a better approach than purchasing.
Income Capitalization Approach
An investor can look at how much income a property will generate to determine its value. This income can be derived from assessing similar properties while factoring in maintenance and other costs.
For example, if a building has a sale price of $800,000 and the expected yield is 5%, the expected income will be $40,000. This could be enhanced by improving things like energy efficiency. The expected future income is discounted to reflect the current commercial property value.
Value per Gross Rent Multiplier
The Gross Rent Multiplier (GRM) method determines the potential real estate value by dividing the price by the gross income. For example, a property that sells for $600,000 and generates $80,000 will have a GRM of 7.5. Investors can use this to find properties that have a low buying price in relation to the potential income, making them a good investment.
Value per Door
This approach is typically only used for apartment buildings with multiple units. It helps determine the worth of the entire building based on how many units there are. For example, a building that costs $6 million and has 40 apartments will have a value of $150,000 per door, regardless of the sizes of the individual units.
Professional Commercial Property Valuation
While commercial property valuation is essential for any investor, it's not always simple. It's best to work with a professional property manager if you want to ensure you do things right. This will help you make the best investments and reach your goals.
PMI Putnam is a leading real estate management company based in Putnam, CT. We offer a full range of services and have been in business for almost 20 years. Take a look at our commercial property services page to find out more about what we can do.
