How To Value Commercial Property

The very first thing you need to ask yourself when wanting to purchase a new commercial property is what is its value not it’s selling price? You need to know what you’re going to be able to sell it for in order to make a profit before buying it. Also ask yourself if the asking price is relative to the income the property is generating.Vendors usually take chances and try to price a commercial property based on its future value. Unfortunately most vendors don’t get their properties sold as banks don’t look at the future value but the current market value of that property. So how do you value commercial property? Below are three tips I use to help me make the right decision when buying a property.Commercial Property ComparisonOne of the best ways to value a property is to compare its selling price with other properties which are in the same location and are more or less the same size. By seeing what kind of income other properties generate will also give you good idea on what you can charge for the one you want to buy.Replacement CostThe second thing you need to look at is what it would cost to replace the building. If you would have to spend one million rand to build a new building and it only costs 500 thousand rand to buy it in its current state it might be well worth the investment.Income Generating ValueThis is the most popular way to determine the value of a commercial property and it is called the capitalization rate also known as the Cap Rate. This is calculated by dividing the purchase price of your property by the net operating income or NOI. The NOI is the amount the property is taking in from rent, parking, storage, vending etc minus your vacancy rates, repairs, maintenance, taxes and all of the other expenses you might have associated with the property.In other words if you have a property that generated R150,000 per year but it has expenses of R50,000 per year that would leave you with a NOI of R100,000 per year. If you purchased a property worth one million rand and it generates a income of R100,000 per year that would be called a 10 cap property. The 10 cap means you would get a 10% return on your investment each and every year for your one million rand invested assuming you bought the property cash.

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