Commercial Property Investing 101 — Beginner Tips On How To Value Commercial Real Estate

Real estate offers investors far more opportunities to generate income than renting out residential spaces. Although properties like single-family units are a popular way to break into the real estate market, investors also have the option to put their capital to work in commercial real estate projects. This well-established sector — which includes properties like retail spaces, warehouses, and office buildings — promises to deliver consistent inflows from business tenants. Still, there are many considerations new investors need to factor into their growth forecasts before diving into an attractive land opportunity.

Commercial real estate has exciting potential, but whether investors profit from their decisions depends on how well they strategize their investment. Learning more about the basic ways to evaluate commercial property helps investors make the right call for their financial goals.

A Fundamental Understanding of Commercial Property Values

Understanding of Commercial Property Values

When investors first start investigating commercial property possibilities, they often ask whether the options they’re considering are a “fair deal.” While there’s no straightforward equation to assess a commercial property’s value, investors often combine three major valuation metrics to get a comprehensive sense of a property’s fair price.

  • Market value: Arguably, the market value is the most influential of the three property valuations for commercial real estate since it represents the estimated price a hypothetical buyer is ready to pay for this property today. To arrive at this number, analysts pay careful attention to sales for comparable properties (aka comps) in the area, noticeable market trends, and income-generating potential for the most accurate assessment of the property’s real-time worth.
  • Appraised value: Appraised value takes market value research to the next level by bringing in a licensed appraiser for a formal opinion of a property’s worth. While these expert opinions cost more time and resources, they provide investors with verifiable documents and unbiased information on a commercial property’s fair price and future potential. Appraisers can also point out details that either detract from or increase a property’s worth that aren’t easily seen in market value reports.
  • Assessed value: Of the three value metrics, assessed value is the most accessible, but it doesn’t include as many features in its estimation. Assessed value refers to the price assigned to a property by local government authorities, and it’s primarily used for taxation purposes. While this price helps investors get a preliminary sense of a commercial property’s worth and tax bracket, it only accounts for a few dynamic data points compared with the market and appraised values.

Tools and Resources to Determine Commercial Property Values

Determine Commercial Property Values

Gathering and synthesizing data on a commercial property’s value takes time, but investors have many resources at their fingertips to make this process as seamless as possible. While investors often refer to third parties to get a thorough read on property valuations, there are plenty of ways to get started assessing the commercial real estate market before deciding whether to enlist professional help.

Online Databases and Platforms

A simple way to get started analyzing prices for commercial real estate is to investigate trusted commercial property platforms for up-to-date details on the market and analytical tools for specific areas. These websites provide investors with an easy way to get a bird’s-eye-view into many worthwhile metrics, including recent auctions and listings, area demographics, and completed sales data.

After pouring through commercial real estate pages consider supplementing this info with databases like public assessors and land records in your target area. Local governments keep meticulous tabs on property listings in their territories, which is excellent news for investors interested in reviewing relevant details like tax records, ownership history, and zoning laws for their prospective commercial property.

These websites are particularly helpful when considering the legal and regulatory aspects of building and operating commercial property in a particular area. By combining the details from these resources, investors have a lot to draw on when evaluating a commercial property’s price and calculating its expected income potential.

Social Media and In-Person Events

Today’s software solutions offer a lot of information to commercial property investors, but they can’t reveal all the nuances in the real estate market. For more “street smarts” on getting involved in the commercial real estate industry, it helps to get involved with people already immersed in this market via forums, groups, and events.

Scout out opportunities to connect with commercial real estate gurus on social media sites, and watch out for any workshops or webinars in a target area through professional networking platforms like LinkedIn. Connecting with the commercial real estate community in person often helps put people on the right path to finding their perfect property.

Professional Appraisal Services

If after all of this preliminary research, you’re interested in moving forward with a commercial real estate property, it’s time to bring in a licensed appraiser for a professional assessment. Certified appraisers use their industry-standard methodologies to evaluate different commercial properties, including sales comparisons in the area, the overall state of the property, and the potential for income generation. A detailed property appraisal helps provide a point of comparison to an investor’s initial market research and helps them decide whether to seriously pursue financing for a property opportunity.

Consider Land Brokers For Commercial Real Estate Help

Although it’s getting easier to find information on commercial property valuations, there are still many challenges and questions for investors new to this field. If investors are struggling to figure out the right price for a commercial real estate project, it may be worthwhile to reach out to professional land brokers in their area.

Real estate sites like Land Brokers MLS have years of experience helping people in the commercial real estate sector secure deals that meet their goals and funding requirements. Contact Land Brokers MLS today to find out how our team can help you get started with commercial real estate development.

Frequently Asked Questions

Frequently Asked Questions on Commercial Property

How Do You Find The Value Of A Commercial Property?

To determine the value of a commercial property, various methods can be employed based on the property’s characteristics and market conditions:

  • The Cost Approach assesses value by adding the land cost to the construction cost of a new building minus depreciation, useful for unique or new properties.
  • The Sales Comparison Approach estimates property value by comparing it with similar recently sold properties, adjusting for differences such as size and location.
  • The Income Approach calculates value based on the net operating income divided by the capitalization rate, suitable for income-generating properties.
  • The Discounted Cash Flow Approach projects future cash flows and discounts them to present value, ideal for properties with variable income over time.
  • The Gross Rent Multiplier Approach multiplies the gross rents by a predetermined number, used alongside other methods for a more comprehensive valuation​.

Each method offers a different perspective, and using multiple approaches can lead to a more accurate valuation.

How To Determine If A Commercial Property Is A Good Investment?

To determine if a commercial property is a good investment, consider several key aspects. Start with the Net Operating Income (NOI), which should be positive and sufficient to cover any loans and yield a profit. The capitalization rate (cap rate), calculated by dividing the NOI by the property’s market value, gives a snapshot of potential returns. A typical good cap rate ranges from 4% to 10%. Assess the cash flow to ensure it can adequately cover your investment.