Before buying a commercial building, it is very important to know whether it’s worth. The most effective way to determine the value is to look at the income a property produces. There are other ways to find the value of a building, but use the income approach is practical.
Consider: if a property is empty, it is probably not willing to pay $ 12 million, because then you’d have to make loan payments, secure and pay for utilities, all without the cash flow. You should have lots of money to make it work. But if he had aligned tenants who were eager to be in that building, it might be worth making payments with no income for a while. The value of the property is what people pay for rent.
- Discover what the holidays are. Be sure to take into account what is the vacancy rate and if the rents are above, below or similar to what tenants are paying other nearby buildings. The comparative amount of rent will make a difference if you need to find new tenants. If rents are above market, it can be difficult to get a tenant. If rents are below market, finding a tenant should be easy.
- Subtract the amount of vacancy rates and operating costs. If the vacancy rate is 5% and rents are $ 100,000, subtract $ 5,000 to account for vacancies. Operating costs vary for each building, but usually run from 40 to 50% of the gross income in an apartment building. The number that comes up is the NOI (NOI English Net Operating Income) or net operating income.
- See the capitalization rate of the area, also known as cap rate. This is the return that investors expect of a property. For example; a property that costs a $ 1,000,000 and had an income of $ 100,000 a year would have a maximum rate of 10%. In popular areas, investors usually accept lower yields because the investment is safe. In smaller cities or less popular areas, investors expect higher returns. A sales representative will be able to tell you what is the maximum rate in the area you are considering.
- Apply this formula: property value = NOI / Capitalization Rate For example, a property has a net operating income of $ 24,000 a year, and the capitalization rate in the area is 14%. Your equation would be: 24,000 / 0.14 = 171,428.57. If the seller is asking $ 200,000, it’s expensive. If you’re asking $ 150,000, could be a bargain.