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What's the best way to value your property?

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If you own or plan to buy or sell commercial real estate, you need to know how to value your property. Valuing your property is not only important for determining the fair market price, but also for securing financing, negotiating leases, paying taxes, and planning for the future. But how do you value your property? What methods and factors should you consider? In this article, we will explain the three main methods of property valuation and how to apply them to your commercial real estate.

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Nicolas Lassaux

Co-Founder and Head of Machine Learning @ HelloData.ai

1 Income approach

The income approach is based on the idea that the value of your property is equal to the present value of the future income it can generate. This method is suitable for properties that produce steady and predictable cash flows, such as office buildings, retail centers, or apartment complexes. To use the income approach, you need to estimate the net operating income (NOI) of your property, which is the difference between the gross income and the operating expenses. Then, you need to divide the NOI by the capitalization rate (cap rate), which is the rate of return that investors expect from similar properties in the market. The formula for the income approach is:

Value = NOI / Cap Rate

For example, if your property has an NOI of $100,000 and a cap rate of 8%, the value of your property is:

Value = $100,000 / 0.08 = $1,250,000

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Samuel Lim

Real Estate | Hospitality | Business Development | Asset Management | Business Strategy | Relationship Management
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These three methods are the ones typically taught in the valuation of real estate. The income approach has been largely used in the valuation of properties with steady income, one also needs to consider the highest and best use of the site. Is the site best used as an office (steady income) or perhaps better as a residential? If it's the latter, then perhaps these sales comparison method should be used.

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2 Sales comparison approach

The sales comparison approach is based on the idea that the value of your property is equal to the average price of comparable properties that have sold recently in the market. This method is suitable for properties that have similar characteristics and features, such as location, size, quality, condition, and amenities. To use the sales comparison approach, you need to identify and analyze at least three comparable properties that have sold within the last six months in the same or similar market as your property. Then, you need to adjust the prices of the comparable properties to account for any differences or discrepancies with your property, such as age, design, or occupancy. The formula for the sales comparison approach is:

Value = Average Price of Comparable Properties + or - Adjustments

For example, if the average price of three comparable properties is $1,200,000, and your property has a newer roof that adds $50,000 to its value, and a lower occupancy rate that subtracts $100,000 from its value, the value of your property is:

Value = $1,200,000 + $50,000 - $100,000 = $1,150,000

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Nicolas Lassaux

Co-Founder and Head of Machine Learning @ HelloData.ai
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Picking sales comps objectively, and "adjusting" the prices correctly is better done by 3rd party entities, or even better by algorithms rather than by stakeholders. Since those decisions will be very correlated with the outcome, you want them to be unbiased, accurate and therefore based on data.

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3 Cost approach

The cost approach is based on the idea that the value of your property is equal to the cost of rebuilding it from scratch. This method is suitable for properties that are unique, specialized, or have no comparable properties in the market, such as churches, schools, or hospitals. To use the cost approach, you need to estimate the replacement cost of your property, which is the amount of money it would take to construct a similar property with the same quality and functionality. Then, you need to subtract the depreciation of your property, which is the loss of value due to physical wear and tear, functional obsolescence, or economic factors. The formula for the cost approach is:

Value = Replacement Cost - Depreciation

For example, if the replacement cost of your property is $1,500,000, and the depreciation of your property is $300,000, the value of your property is:

Value = $1,500,000 - $300,000 = $1,200,000

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4 Here’s what else to consider

This is a space to share examples, stories, or insights that don’t fit into any of the previous sections. What else would you like to add?

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Akilino Powesiu

?????? Communications & Creative Solutions Specialist | Self-taught Writer | Web Content Writer | Social Media Content Writer ????????
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As far as my knowledge in PNG real estate goes, these calculations are, thus far, new to the industry. I for one haven't been in the thick of things relating to calculating property values. I've only been able to research and write about related topics so far. But I'd be grateful to find out if an in-country real estate agent or property valuer is currently utilising one or all of those calculations. Nonetheless, as a web content writer enthusiastic about teaching my country men and women all about real estate, it will do a whole lot of justice to write about these topics. And if I was to choose between them (the calculations), I'd go for the first calculation ??????

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What's the best way to value your property?

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1 Income approach

2 Sales comparison approach

3 Cost approach

4 Here’s what else to consider

Commercial Real Estate

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What's the best way to value your property?

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1 Income approach

2 Sales comparison approach

3 Cost approach

4 Here’s what else to consider

Commercial Real Estate

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