Which Commercial Property Appraisals Work Best?

Whether you're buying, selling, or using commercial property as collateral, you will need to understand how much it's worth. Commercial real estate appraisals use a spread of techniques. It's crucial to be told of those techniques to pick the one that most accurately fits your requirements. It helps you make considered decisions when undertaking commercial property decisions and transactions. What are the commonly used approaches?

Income Capitalization

In this method, ‌net operating income is multiplied by a capitalization factor to get the assessed property value. Net operating income is ‌the amount of cash a property may make during a year before taxes and costs.

The capitalization factor comes from properties that have recently sold within the same area. For instance, a $1 million structure with a 30%  capitalization factor would create $30,000 in yearly revenue.

Sales Comparison

It compares ‌to previously sold properties. It's based on how much money you'd make if you sold your property immediately. Only the sales prices of comparable properties are considered by the commercial land appraiser. Other variables which will have impacted the acquisition, like finance or other exceptional circumstances, aren't considered.

Cost Analysis

This strategy takes into consideration the value of building a property based on its size and site. All construction expenditures, including architectural, engineering, and labor, are factored in.

It's a great option for commercial real estate appraisals if you're intending to develop a new structure. It's especially helpful if you're looking to buy an older property since it looks for potential for development.

Gross Rent Multiplier Approach 

This method simply determines how much rent a property may generate and how long it will take to recoup your investment. For example, a $1 million property with $50k gross rentals per year has a Gross Rent Multiplier (GRM) of 20. When evaluating rental properties, these commercial property appraisals might come in helpful.

Rentable Square Foot

This approach compares a property's overall square footage to the usable square footage that may be rented out, which includes common spaces like lobbies and stairwells. For example, the common area factor of a building with 100,000 square feet of common spaces and 10,000 square feet of common areas, is 10%. This method will give you the exact amount of rent expectable. 

Are you considering making a real estate investment? Speak with an appraiser about proper commercial real estate appraisals to make an informed choice you won't regret.