Valuating of Commercial Property
Real estate investing is one of the most lucrative forms of real estate investment. Depending on the property’s location, kind, and condition, the value of the Commercial Property may range from several hundred thousand dollars to more than five million dollars. But even the best appraiser of commercial property values will not provide an exact comparison, as each property has its unique selling conditions and individual appeal that will vary from place to place. As a result, it isn’t easy to give a blanket estimate of how much your commercial property is worth.
Unfortunately, there are no national commercial property valuation standards. Rather, each state establishes its guidelines and its methods for judging the value of the commercial property. It is important to understand the differences between commercial property evaluation methods and look out for subtle variations in valuation approaches that may affect your results. These different methods include:
The total cost approach (also called the income approach) considers only the actual building and any depreciated value and applies it to all expenses incurred during its operation. Thus, it omits the depreciation due to normal wear and tear on structures and includes only construction costs. Because the total cost of doing business affects the overall value, this method tends to undervalue the commercial property.
Evaluates The Income Generated by A Commercial Property
The income Approach evaluates the income generated by a commercial property as opposed to the total revenue generated. For example, if the property generates a thirty thousand dollar monthly rental income, it would be valued using the above numbers. However, if the income generated is twenty thousand dollars per month, then the business’s gross income would be evaluated using the numbers defined above minus thirty thousand. This is the reason why many investors use the gross income approach when valuing the commercial property. However, the problem with this approach is that it does not provide a way of measuring the profitability of operations since it doesn’t take into account the effect of expenses or the impact of taxes.
The Net Present Value Approach (also known as the NPA approach) uses historical data to estimate the present-day market value for the property. This essentially means that the total cost of doing business (the total cost of acquisition and operation) is subtracted from the current market value. The resulting figure is the true value of the property. Because this can be a complex calculation, it is typically done using an attorney or a Certified Public Accountant specialising in commercial real estate. This is one of the best methods of determining the true market value of the commercial property.
What Purpose of Property Valuation During COVID-19?
Both of these approaches are useful for valuing a property for tax purposes. However, they do have some limitations. While the gross income approach may underestimate the profitability of operations, it may underestimate the property’s true value. The tax cost approach tends to underestimate the profits and may give a higher value than the property’s true worth.
There are three other methods often used in commercial Property Valuation that can be quite accurate. The first is the Flothers Approach which compares market sales of similar properties to comparable properties located outside of the same city. The second valuation method uses Purchasing Cost Method, which considers only those factors that directly affect the cost of acquisition of the property, such as the purchase price, any required financing and leases. The third approach is the Income Property Approach which analyzes the income received if the property were sold in today’s market to a willing buyer.
There are several important considerations to make when valuing properties. One of the most important considerations for any real estate investor is whether to invest in distressed properties. The property’s location, the current property tax levels and prevailing interest rates are also important considerations that must be made when evaluating properties.