Are you planning to start a business in commercial real estate? Do you want to invest in a commercial real estate? If you are, then conducting a commercial real estate valuation is a must. Why? Well who wouldn’t want to know if it is a worthy investment and if the business itself will be financially feasible for a long time?
Valuation models are paramount before acquiring or starting a business, especially real estate businesses. Since you will be handling properties and need to determine the value of the property. There are common methods to determine the value of a commercial property. Such as:
- Cost Approach – This valuation method is considered if you plan to rebuild the structure from scratch. You will need to account the cost to rebuild such as the land, construction materials and other expenditures associated with the replacement of the existing structure.
- Sales Comparison Approach – This is also known as the “market approach”. This valuation method heavily relies upon recent sales data for comparable properties. You will need to ascertain the fair market value for the property.
- Income Capitalization Approach – This valuation method is primarily based on the expected returns an investor can derive from the property.
- Value Per Door and Value Per Gross Rent Multiplier – Both are valuation methods which offers a valuable insight to potential investors. The value per door valuation is a method used to value the building’s worth by the number of units. While the latter, value per gross rent multiplier, is a valuation method which makes use of Gross Rent Multiplier (GRM), a back-of-the-envelope calculation used to measure and compare a property’s potential value by taking the price of the property divided by its gross income. This is commonly used to identify lower-priced properties relative to their potential income in the market.
In conducting a commercial real estate valuation, it is evident on how much it affects your decision making on which valuation method is the most effective and which will help you choose a property that will garner you a better yield. You must be always prepared and analyze well, but then again, trusting your guts along with the valuation model will strengthen your conviction on which commercial property you want to pour your money on.
To help you understand more in detail about each valuation methods, you can read more here: Commercial Real Estate Valuation Methods. There are also commercial real estate financial model templates provided by eFinancialModels that you can download to serve as a base to start your very own valuation model.