If you are a commercial real estate owner, you’ll likely need to have a commercial real estate appraisal done at some point. The benefits of an accurate appraisal go beyond how much to spend on a property or how large of a loan you can take out to purchase a property. Here’s what you need to know about commercial appraisals.
What Is a Commercial Appraisal?
A real estate appraisal is an objective opinion on the value of a property. A commercial appraisal specifically focuses on multifamily housing, office, and retail spaces. If you’re buying a new property, lenders require a professional appraisal so that they can calculate an appropriate amount of money to give out.
As an investor, you can use an appraisal to determine the value of your property for your own purposes. Knowing the value of a property can help you determine what improvements to make and help you make better decisions about your commercial real estate business.
Different Types of Appraisals
A commercial real estate appraiser can assess your property in four different ways:
- Cost approach determines how much the building would cost if it were to be rebuilt in the present market. It isn’t a common valuation that is used for commercial real estate since it focuses more on new buildings. If a cost approach is used on an older building, there could be differences in the cost due to inflation or by making renovations.
The formula for this is: Land cost + cost to build new – accumulated depreciation = property value
- Income approach calculates how much income the property should be able to generate in the current market using net operating income and cap rate. This approach is commonly used for commercial real estate. However, if it is hard to find comparable sales to calculate the cap rate, the valuation may not be accurate.
The formula for this is: Net operating income/ Capitalization rate = property value
- The sales comparison approach is usually used in residential real estate. Individual investors are more likely to use this approach than commercial appraisers. It takes into account comparable properties to determine another property’s value. In order to find a comparable commercial property, the appraiser might have to search beyond the market, which can make the valuation unreliable.
- Gross rent multiplier approach is another way that is used more often by individual investors than by professional appraisers. It compares other gross rent multipliers for the area to the subject property in order to get a valuation.
The formula for this is: Gross rent multiplier x annual income = property valuation
If you want an accurate commercial real estate appraisal, the income approach is generally the most beneficial.
STRATAFOLIO can help you track NOI and cap rates so you can quickly and easily calculate property value using the income approach. Armed with the right data, you can make better financial decisions for your business. Schedule a 1:1 call to find out how STRATAFOLIO can help you.