Decide Commercial Property Market Value Before Investing

Commercial property is often used as a source of profit for investors. It can provide great returns with a minimal amount of work. If you are interested in buying commercial real estate, it is important to determine how much the property is worth in terms of market value. This way you will know whether a certain piece of land will be a profitable investment or not.

What is a Commercial Property?

Commercial property consists of buildings and land that is specifically zoned for business uses, and not for residential living. This includes all sorts of establishments like industrial buildings, offices and hotels. Things like hospitals, malls, golf courses, self-storage units, and independent retail stores are all meant for commercial purposes. They generate profit for investors either through rental income or from capital gains, when resold at a higher price.

Use the Gross Rent Multiplier (GRM) to Determine Value

The value of a commercial property is based on several factors. For instance, more the building generates rental income the more valuable it is in general. This is affected by the location, whether it is in a busy popular area of a business district or whether it is on the outskirts of a town, easily accessible or just out of the way. The property’s worth is also determined by the value of neighboring buildings as well as how much of the similar type of real estate is available in a given area.

Certainly you can find out the market value of the commercial property by hiring a real estate professional, but you can make your own quick calculations to get a rough idea about the worth of a particular estate. This can be done by using this formula:

Market Value= Annual Gross Rent * Gross Rent Multiplier

To use this formula you will obviously need to find out some basic information about the land from the seller or from real estate agent listing the building. You will need to find out how much revenue the property brings in each year in rental income. That is the annual gross income.

The GRM is a ratio of a property’s sales price divided by its annual gross rents. To determine the GRM on your own, you need to get hold of a several listings for properties that are similar to the one you are considering. You find the GRM or each one and average them all together.

Once you have the GRM you will be able to figure out the approximate market value of an investment property. For example, if you know that the its rental incomes total is $100,000 for the year and the average GRM for similar properties is 8, than the value of your prospective investment land is $800,000. Using this formula is pretty accurate, and it will help you as you try to narrow down your selection of buildings to buy. Yet when it’s time to actually buy the building, you will need a professional appraiser to satisfy the requirements of your investment loan.



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