Are you a commercial property owner in Neenah, WI? If so, you know there's serious income potential throughout the Badger State. However, before you can purchase and rent out a space, you may need to negotiate the transition.
This is where commercial property valuation comes into play. Understanding how this process works is key to making sure you're getting a solid deal. Today, we're sharing three strategic methods to help you get started.
Why Property Valuation Matters
Any time you buy commercial real estate, you need an accurate idea of how much the property is worth. This is true whether you intend to earn income from it or sell it for a profit.
If you pay too much for the space, it can be difficult to meet your return objectives. To make sure the listed price is realistic, you can take one of three approaches: cost approach, income approach, or sales commission comparison.
Let's take a look at each of these.
Cost Approach
With this valuation approach, you'll focus on three economic factors:
- The current market value of the land the property sits on
- Construction costs required to rebuild the space from scratch
- The building's current rate of depreciation
When calculating the depreciation rate, be sure to consider anything that could lower the building's value over time, including its age, required maintenance, and other signs of wear and tear.
The basic formula looks like this:
- Commercial property value = Cost to replace current building (-) accrued depreciation (+) value of land
This approach works best when the building is newly built, the land is still under development, or the property has unique features. If the building is older or the land value is fully developed, it can be harder to calculate depreciation rates.
Income Approach
Most people use the income approach to determine the value of income-generating properties. To get a clearer picture of how much income the space might generate, investors will research the value of comparable properties, minus any expenses they might have to pay to generate revenue (such as routine maintenance).
Note that the total income value will also take the property's capitalization rate into account. The formula to find this rate is:
- Net annual rental income / current property value
While this approach can help you plan your commercial investments, it can be difficult to find all the data points required, including growth rates and discount rates.
Sales Comparison Approach
When estimating the value of their commercial property, investors can start by comparing recent, similar sales. This can give them an idea of how much their property may be worth, as long as key details are relatively similar, including:
- Building size
- Building location
- Building condition
- Building age
- Local demographics
This approach works best in areas that have multiple commercial properties for sale at any given time. Its formula is:
- Commercial property value = Price of comparable properties +/- adjustments for major differences
Find Help With Commercial Property Valuation
Does the idea of tackling commercial property valuation on your own seem daunting? This is an important step in your investment, and it's one you don't want to skip.
Our team is well-versed in handling every aspect of property management for our Neenah, WI clients. We can support your valuation efforts and lend the professional guidance you need. Contact us to schedule a consultation!
