Calculating the value of a commercial property involves analyzing multiple factors. There are three main approaches appraisers and investors use: Income Approach, Sales Comparison Approach, and Cost Approach. Here’s a breakdown:
| Approach | How It Works | When It’s Used |
|---|---|---|
| Income Approach | Uses the income the property generates (rent, leases) to estimate value. Formula: Value = Net Operating Income (NOI) ÷ Capitalization Rate (Cap Rate). | Best for office buildings, retail centers, apartments, or any property generating income. |
| Sales Comparison Approach | Compares the property to similar properties recently sold in the area. Adjustments are made for differences (size, location, condition). | Common for retail, industrial, or properties with many comparable sales. |
| Cost Approach | Estimates the cost to rebuild the property from scratch minus depreciation, plus land value. Formula: Property Value = Land Value + (Replacement Cost – Depreciation). | Often used for new buildings or special-purpose properties with few comparables. |
Steps to Calculate Commercial Property Value Using the Income Approach (most common):
- Determine Gross Income: Add up all rental income and other revenue.
- Subtract Operating Expenses: Maintenance, property management, insurance, taxes, etc., to get Net Operating Income (NOI).
- Choose a Cap Rate: The expected rate of return for similar properties in the area (often based on market data).
- Calculate Value: Divide NOI by Cap Rate.
Example:
- Annual NOI: $100,000
- Cap Rate: 8% (0.08)
- Property Value = $100,000 ÷ 0.08 = $1,250,000
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