How can you value commercial real estate properties effectively?

1 The income approach

The income approach is based on the idea that the value of a commercial property is determined by the amount of income it can generate. To use this method, you need to estimate the net operating income (NOI) of the property, which is the difference between the gross income and the operating expenses. Then, you need to apply a capitalization rate (cap rate) to the NOI, which is the ratio of the NOI to the property value. The cap rate reflects the risk and return of the investment, and it can vary depending on the location, type, and quality of the property. The formula for the income approach is: Property value = NOI / cap rate For example, if a property has an NOI of $100,000 and a cap rate of 10%, then the property value is $1,000,000.

2 The sales comparison approach

The sales comparison approach is based on the idea that the value of a commercial property is influenced by the prices of similar properties that have been sold recently. To use this method, you need to find comparable properties that have similar characteristics, such as location, size, condition, age, and amenities. Then, you need to adjust the prices of the comparable properties to account for any differences with the subject property, such as improvements, vacancies, or leases. The adjusted prices of the comparable properties will give you a range of values for the subject property. The formula for the sales comparison approach is: Property value = average price of comparable properties +/- adjustments For example, if the average price of comparable properties is $500,000 and the subject property has a higher vacancy rate of 10%, then you need to deduct 10% of $500,000, which is $50,000, from the average price. The property value is $450,000.