With commercial property becoming one of the best income generating investments, it is important to properly value these properties. Valuing commercial property becomes increasingly difficult especially when the investor needs to keep track of the current price and the future income generating potential of the property. This becomes the most difficult task of valuing commercial property because similar properties built side by side can value differently at times. This is probably because a great deal of information and surveys are required before employing a valuation method to value a commercial property. There are four commonly used valuation techniques that are used by investors to help decide the value of a commercial property.
Direct comparison approach:
Direct comparison approach is a simple and a fast way to value a commercial property. This method allows the investor to compare the values and sale prices of similar buildings around the property of interest. The sale prices of similar buildings can be obtained from the builders, other investors, public records or even websites. However a major disadvantage of this method is that sale prices and values may change in cases of renovation, damage or other factors.
Cost based approach:
The cost based method is usually used in combination with other valuation methods to give accurate values of properties. In this method, the value of a commercial property is determined based on technical and infrastructural developments such as parking spaces and buildings. However the method is highly inaccurate when used alone but highly precise values of a property can be determined when this method is used in union with other methods.
Gross rent multiplier approach:
This is one of the most accurate methods for valuating a commercial property. This method is fast and precise and very little information regarding the property is required to determine the value of the commercial property. The method requires the annual gross rental income to be multiplied by the gross rent multiplier which is the number of years the investor thinks it will take to pay for the purchase. In case of vacant commercial plots, a specific vacancy factor is also multiplied with the other factors to reach a level of accuracy.
Cap rate approach:
The cap rate approach is often used in combination with other valuation techniques to determine accurately the value of a property. The cap rate method expresses the values in percentages and is calculated by dividing operating income by the cost of the property. The operating property is the net income subtracted from the expenses and the vacancies in the property. Although the method is a little time consuming when compared to other valuation methods, this is a highly accurate technique for valuing a large commercial property.
Most property valuation method can be employed for large commercial properties to determine the values and prices accurately. However a large amount of information and details are required when it comes to dealing with commercial property, so most investors try to get help from professions who have immense amount of experience in the valuing commercial properties. They make use of a combination of different valuation approaches to give their clients the most precise and the most accurate value of their commercial properties.