It’s important to have an idea on how the value of commercial real estate is calculated when negotiating for your clients. There are lots of different strategies you can use for commercial real estate. The following are some of the most popular strategies used by major real estate companies.
Cost Approach. This method takes into account the amount of money it would cost to rebuild a property from the ground up. The cost approach is a good option to consider when it’s hard to locate a comparable property. For very unique, one-of-a-kind buildings, as well as those that have undergone significant upgrades and improvements, this is a fairer way of determining value.
Income Capitalization Approach. This approach is based on the amount of money an investor is likely to derive from a specific property. For example, you’ll need to compare the property to similar properties in the area. You’ll also need to factor in decreases in income based on maintenance costs and other necessary expenses.
Sales Comparison Approach. This approach is also known as the market approach. When you use this method to find the value of your property, you rely heavily on recent sales of similar properties. This approach often gets used when determining the valuation of apartment buildings. It can be very effective, but it’s not always reliable, especially during slow market times.
Gross Rent Multiplier. This method takes the price of a property and divides it by that property’s gross income. Essentially, it tells you how long it would take for a property to “pay for itself” with its top-line revenue. This method often gets used when identifying properties that have a price that’s very low relative to their income potential.
Value Per Door. This is not as popular as some of the other methods on this list. It can be useful for folks who need help determining the valuation of an apartment building. This method breaks down the worth of a building based on the number of units it contains.