One of the primary reasons why investors choose commercial property is the rental income and the potential for some capital appreciation. Investing in commercial real estate usually requires more sophistication and more significant amounts of capital than residential real estate. However, the benefits include:  

• Ensured steady cash flow
• The building of substantial equity
• Substantial leverage for future investments
• Excellent appreciation value. 

When it comes to valuing a commercial property, several methods can be used. These methods include:

Comparable Sales Method

This method is also called ‘direct comparison’ and is a popular way to appraise commercial property. It involves comparing the property with others of similar types and standards that have been recently sold.

This direct comparison is generally the basis for sales analysis, and this method relies on actual market evidence. Direct comparison is pretty simplistic in operation and forms an integral part of other appraisal methods. Comparable market analysis (CMA) or direct comparison method is best used for appraising industrial strata units, as they are often highly similar. Other forms of commercial property can vary greatly, making this appraisal less reliable. Factors commonly reviewed in this method include:

• Date of sale
• Location of property
• Size of the property
• Physical characteristics (clearance, access, etc.)
• Amenities and services (proximity to public transport, infrastructure, etc.)
• Zoning of the property

Income Capitalisation Approach

The income capitalisation approach is a valuation method that puts the expectation of future benefits first and foremost. The Income Approach determines value by taking into account the market rent that a property can reasonably be expected to generate, as well as the potential resale value of the property. Essentially, this method converts income into value by placing payment as the primary determiner of value.

Value Per Door

Like the GRM, this method is fast and easy, although maybe not the most accurate compared to some of the other valuation approaches on valuing commercial property. This method takes the total value of a comparable building and divides that amount per door to find a point of reference for another similar property.

This method is only helpful if you are using relatively equivalent comparisons. It falls short by not taking into account apartment size and square footage differences, the quality of the housing and other ongoing costs associated with running a multifamily property.