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Methods to value a commercial real estate

Miniature house over coins

Investing in Tri-Valley? These tried and tested valuation methods will help you determine how much a piece of commercial real estate in Pleasanton, CA is truly worth.

Income capitalization approach

Perhaps the most widely used valuation method for commercial property, the income capitalization approach is mostly concerned with the amount of income that you can expect to generate from the property. This projection is primarily based on comparable properties, or comps, and takes maintenance costs, operation costs, rental fees, vacancy rates, and other factors into consideration.

When using this approach, the investor typically does so with the assumption that maintenance and operational costs will go down in the future by tightening inefficiencies and passing on the cost of utilities to tenants.

Value per gross rent multiplier (GRM)

This commercial real estate valuation formula is used for properties that are priced low relative to their potential income in the market. The GRM approach divides the price of a commercial property by its annual gross income in order to determine its potential valuation.

For instance, a $500,000-property that generates up to $70,000 in gross rental income per year will have a GRM of roughly 7.14.

Sales comparison approach

Although the sales comparison approach is primarily used for residential real estate, it is also one of the most reliable ways to determine commercial real estate value. Also called the market approach, it makes heavy use of recent sales data for comps within the vicinity.

Examining data on recently sold commercial buildings in the same area allows property investors to get an idea of a particular listing’s fair market value (FMV).

However, this approach is not entirely fool-proof. General and local market conditions can affect the value of any given commercial property. Moreover, it can be difficult to find recent comps for properties with unique features and amenities.

Cost approach

This approach factors in the costs of rebuilding the property from the ground up, including the current value of the land it’s on, as well as the inflated prices of construction materials and labor in the present economy.

The cost approach usually comes into play when comps are hard to find, making it ideal for commercial properties with unique or highly customized improvements, as well as upgrades that significantly boost the value of the land that the structure is built on.

Value per door

Customarily used for apartment communities, the value per door method determines the worth of a property based on the number of habitable units it harbors. In short, it is the total price of the property divided by the number of units, allowing investors to determine the value of each unit or “door”.

To simplify, a development with 20 housing units valued at valued at $200,000 each would have a $4 million price tag.

This method is used for apartment buildings of similar quality.

When investing in Tri-Valley commercial real estate, a local agent can help you find incredible bargains. Allow me, Alice Chen, to assist you as you locate your next investment. Talk to me here or 925.216.0676 to list your home.