How do you value commercial property?
by Mish Daniel | Free Information
Founder of Revolve Commercial, Mish Daniel, was recently on a podcast with Mike Mortlock of MCG Quantity Surveyors. In the podcast, they discussed much about the commercial property investment industry, specifically about how to value commercial property. You can listen to the full podcast here.
The ability of someone to be able to buy, sell, or lease a commercial property depends on the value of the property. However, ascertaining that value during negotiations can be tricky.
This is because commercial values depend on elements out of one’s control, such as the total maintenance cost of the building, the current market price, and the available comparables amongst other industries. Sometimes, how much a buyer is ready to pay also comes into play. Luckily, there are a few methods to help you figure it out.
Read on to discover how to determine the valuation of your commercial property or a property you are interested in.
Valuation of commercial property
Investors use several methods to determine the valuation of any given commercial property. Below are some of the most common methods. If you need help, check out our commercial property buying services. At Revolve Commercial, we can help you every step of the way!
#1. Cost approach
This popular method is used when a new construction is built on a plot of land. It determines the value of a given property as the price of the land plus the construction costs of the building – for example, if the land is valued at $500,000 and the construction of the building itself is estimated to cost $50,000, then the cost approach value is $550,000.
Another factor addressed with this method is this: imagine you own a very large plot of land with fertile soil and running water. Well, it is likely that the most value you could get for the property is if the property was to be used for agricultural purposes. As such, the cost approach would assume the property is used for agriculture and would calculate the price accordingly; it would take into account the average cost of building a farm for example rather than a shopping mall or luxury home.
Most times, lenders prefer to use a cost approach for new construction projects. The only downside to this method is that it does not consider the income the property will generate or the prices of other similar commercial properties.
#2. Sales comparison approach
The sales comparison approach mostly does what it sounds like it would. It compares the prices of similar properties sold recently to determine the current value of another property. This method is used mainly in the residential field, especially when comparing apartment buildings or residential homes with similar characteristics.
The main benefit of this method is that it uses actual market data, which gives investors an idea of the realities on the ground.
#3. Income capitalisation approach
The income capitalisation approach is a popular method that allows you to consider the expectation of future benefits from a given property. This method determines the valuation of a property by checking the expected market rent to be generated and the property’s potential resale value. It also converts income into value by placing income as the principal value determiner.
#4. The Capital Asset Pricing Method (CAPM)
This method introduces concepts such as risk and returns on investment (ROI) to determine a risk factor in investing in a property. For example, if a no-risk investment such as a simple high-yielding savings account has a higher ROI than the potential investment property, evidently it makes little sense in investing in the higher-risk venture. This is what the CAPM determines and is a great tool for investigating whether or not you should invest in a property.
Now that we’ve looked at a few of the valuation methods for commercial property, let’s see how to do what we all want to do – add value to our commercial property.
How to add value to a commercial property
There are a whole variety of methods to add value to your property; we’ve compiled a list of some of our favourites.
#1. Implement strategic fixes and renovations
These changes to your property may be basic cosmetic improvements or serious undertakings such as structural repairs. You should take the time to check out your property and take note of any repairs and renovations that might need to be done. Better still, hire a professional to assess the property for you, to guarantee you make the most profitable renovation.
Aesthetic renovations such as new paint, new decor, and new flooring in some areas of a large office building can significantly add value to your property.
#2. Change the purpose of your property
Another way to potentially grow the value of your property is to change the primary purpose of the property. This means using it for a purpose other than its original intentions; turning a farm into a luxury retreat, turning an old run-down warehouse into a handful of upscale apartments. Of course, the building may already be used for its optimal purpose but it’s certainly something to consider.
#3. Minimise your expenses
Finally, another way to increase the value of your property is to reduce your expenses, as this will increase your profits. Luckily, doing this is fairly straightforward.
Collect statements of all of your historical operating expenses such as electricity, gas, water etc. and examine them closely to figure out where you can cut down on spending. For example, ensuring AC is turned off at night, only having it on under certain conditions etc.
We told you it’s simple!
Commercial property buyer’s agent, in the heart of Brisbane
Learning to add value to your property is one of the best things you can do as an investor. Getting an accurate valuation will open up a world of opportunities.
We’ve built our business on helping people achieve their goals so they can live the lifestyle of their dreams. We will guide you, step by step, through investing in cash-flow-positive commercial real estate. The best part? It’s easier and less expensive than you might think. We teach our clients to make maximum profit with minimal resources and effort. We know what works because we’ve done it and we do it better than anyone else. Revolve Commercial is your go-to commercial property buyers agent, with years of experience!
If you need a hand with any of the tips we’ve provided in this article, why not give us a call?