How Can You Determine The Value Of Commercial Real Estate
Posted on: 4 December 2015
Commercial real estate is not valued the same way as homes are, and determining the value of a property is often completed by looking at the current net income of the building. If you are looking for commercial real estate to purchase, you should learn more about how and why this is done. Here are three things you may want to know.
Why net income affects the value
There is not just one method to use for calculating commercial property values, but a common one involves basing its value on the net income of the property. A property's net income is basically calculated by adding up the total amount of rental income collected for a year and subtracting out all the expenses for the year. The answer to this will tell you if the building produces a positive or negative cash flow.
As you look at the numbers, it is also important to research the information to make sure it is true. For example, the actual expenses of a building will not be exactly what the financial reports say, simply because a building owner has the ability to write things off as expenses that did not actually cost money. A good example of this is depreciation expense.
Commercial property is used for rental purposes. Investors buy buildings, such as apartments or warehouses, and they rent them out to people that need the space. Because of this, a commercial property is only worth as much as the income it can produce. As you begin to look for commercial property to purchase, this is one thing you should keep in mind.
Use the capitalization rate
The way to find out the value of a commercial property will require knowing the net income of the property, but it will also require knowing what the capitalization rate is on the property. The capitalization rate is a rate that tells you how much profit a property can make in a year, and it is in terms of a percentage. In most cases, this rate is 6% to 12%, and higher rates represent higher earnings capacities.
To find out the rate of a building, you may need to ask your real estate agent. Once you know, you can find out the current market value of the property by dividing the net income by this rate. For example, if the net income of a building is $100,000 and the capitalization rate is 10%, the value of the building would be around $1,000,000.
This formula will help you determine how much to offer on commercial real estate. If you need help locating property or analyzing it, you may want to hire a real estate agent, like http://sgcityrealestate.com/, that specializes in commercial real estate.
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