Determine Commercial Real Estate Value - Formulas for Quick Calculation

Want to assess the commercial real estate value quickly? You can assess the property value of a commercial building very simply by applying the three under-mentioned formulas. You can use these values to decide whether you wish to proceed ahead with the deal being offered.

Assess Value by Comparing Net Rent on the Building to Market Rent

Arrive at the net rent on the property by subtracting all the non-recoverable outgoings from the gross rent that the tenant is paying. Divide the net rental with net lettable area to arrive at rent per square meter. Compare the rent per square meter of the building with the market rent per square meter that is being achieved by similar properties. By comparing the two figure you will know if the property is under rented or over rented or at market rent.

Always try to buy a building that is under rented because there will be rental growth. The simplest way to increase the commercial real estate value of a building is by increasing the rents during reviews.

Compare Value by Applying the Capitalization Rate

Check from property valuers, real estate agents, banks, solicitors and recent sales what are the cap rates for similar types of building in the area. Determining cap rates is bit of a subjective judgment as they keep changing depending upon the market conditions and interest rates.

You divide the net rent from the property by the cap rate to determine the market value of the property. Compare the derived commercial real estate value with the price being asked by the vendors. By this simple calculation you will know if the asking price is below or more than the market value.

Compare the Land and Building Cost

You can calculate land and building cost by simply dividing the asking price with the building area of the property that you are buying. For example if the asking price is $2 million for a 1000 m2 commercial building. Then by dividing the asking price of $2 million by 1000 m2 we will get a land and building cost of $2000 per square meter.

By comparing the land and building cost with construction cost of a new building including price of land you will know how the property you intend to buy compares with the replacement cost. If there is a reasonable gap in the land and building costs and if the building compares favorably with the new building then you will have an opportunity to increase the rents and improve the value of the property.

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