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What methods can determine commercial property value?

On Behalf of | May 3, 2024 | Real Estate | 0 comments

Buying property for a Florida business involves more complicated questions than purchasing residential real estate, particularly in the area of valuating property. It is not always easy to figure out how much commercial real estate should cost, mostly due to the varied nature of many business properties.

When you discuss a potential purchase with a seller, you will probably work out a possible means to assign a value to the property you want.

A comparison of similar properties

Residential real estate frequently makes use of the sales comparison approach. This method compares the sale prices of similar properties to come up with an estimate. This calculation makes adjustments for differences in size, age, location and other factors.

While it is possible to employ this method for commercial properties, it can be harder to pull off. Commercial buildings tend to vary much more than personal residences, so it is difficult to make direct property comparisons.

A calculation of property cost

Another method is to calculate the cost of acquiring the land and constructing a new building similar to the one you want to purchase. From there, you deduct any accumulated depreciation from that total cost. This approach assumes you would not pay more for an existing building than the cost of constructing a new one.

However, the cost approach works best for newer properties. It may become less accurate for older buildings due to factors like inflation and potential non-compliance with current building codes.

An income return projection

If you expect your property to generate income through rent, you may benefit from using the income approach. You estimate the net operating income of the property based on rental income and expenses. Then, you divide the NOI by the capitalization rate, which represents the expected rate of return on the investment. A higher NOI and a lower cap rate translate to a higher property value.

It may take time to figure out an effective valuation method, but the effort to come up with an accurate figure is worth it, not just to buy the property, but also to determine add-ons to the building or land that can help boost its worth.