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How to Value Commercial Real Estate [The 4 Main Ways] - YouTube
Channel: Tyler Cauble
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today we're going to be talking about
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the four main ways that commercial real
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estate is valued when determining the
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value of residential real estate
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investors have a pretty easy time
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you simply log into the mls or check
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zillow for comparable properties in the
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area and utilize a price per square foot
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to determine the value of the asset
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you're reviewing analyzing commercial
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real estate on the other hand
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isn't quite as simple there are four
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common ways to determining the value of
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commercial real estate
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sales comps cap rates replacement costs
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and the gross rent multiplier so here's
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how to determine the value
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of commercial real estate investments
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sales cops similar to residential
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properties
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commercial real estate may also be
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valued utilizing sales comps
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comparable properties are similar assets
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that you can compare by
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square footage location type of
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construction
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year built size such as low rise
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mid-rise
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high-rise acreage and so much more when
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using this method
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you'll be comparing prices per square
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foot and adjusting the value based on
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various different aspects
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of each site in sales comps the price
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per square foot
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multiplied by the square footage gives
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you the property value so
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in this example here hundred dollars per
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square foot
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times ten thousand square feet gives you
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a million dollar purchase price
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the sales comp method is the most
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commonly used when an asset
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is largely or completely vacant meaning
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the income
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or obviously a lack thereof adds little
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to no value to the property in this
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instance you'll review the tax records
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or crs data which is a favorite here at
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the kabul group
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to find those comparable properties that
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have recently sold nearby
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your next option is capitalization rates
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or cap rates in my experience the cap
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rate method is
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the most popular for determining the
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value of a commercial real estate
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investment commercial properties are
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largely
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valued based on the amount of income
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that they bring to the owner so
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investors are essentially purchasing the
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stability of the cash flow
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of that asset a cap rate is the
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anticipated cash on cash return if the
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asset was purchased in
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all cash so in a cap rate scenario the
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annual net revenue
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divided by total purchase price gives
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you the cap rate for example
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a hundred thousand dollars per year
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divided by the million dollar purchase
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price would give you a
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tin cap so why do investors use cap
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rates
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well each investment group will have a
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different acquisition method
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some investors may prefer all cash some
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may prefer
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heavy debt and others may only utilize a
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little bit of debt
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in each of these instances the actual
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amount of cash flow to the investors
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will change
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while the property still throws off the
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same amount in annual revenue so cap
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rates give investors a good 30
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000 foot view of the property's revenue
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next we have replacement costs
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some investors will purchase assets
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based on what it would cost to replace
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that asset
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this method is often used hand-in-hand
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with sales comps because it helps the
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investor determine if the building is
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worth buying or if they should
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simply build a new one these buildings
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will often require
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some sort of renovation aspect which
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will be included in that calculation in
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order to properly use this method you
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will need to know the cost of acquiring
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land
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and building a new property the
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replacement cost formula is
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new construction costs minus acquisition
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cost plus renovation
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gives you the delta so for example let's
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say you have a hundred and seventy
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dollars per square foot in new
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construction costs you would subtract
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eighty dollars per square foot if that's
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your acquisition cost of a new building
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plus twenty five dollars per square foot
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in renovations which would give you a
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sixty five dollar per foot
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delta this delta is intended to show the
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potential profit for
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investors in this scenario if that
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difference is positive
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then you could flip the property for a
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profit or rent it out at market rates
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however if the delta is negative then
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you likely don't have a deal
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at all now finally we have the gross
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rent multiplier the gross rent
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multiplier or grm
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is another solid method for determining
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a property's value
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the grm is a ratio of the total price of
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the property
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divided by the gross revenues received
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from that property this number will tell
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you
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how many years it would take to pay off
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the property based on the gross rents
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received
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so a lower number means the investment
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is a better opportunity
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using the grm the total purchase price
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gets divided by the gross rents
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which gives you the gross rent
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multiplier so in this example
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a 100 000 purchase price divided by 10
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000
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a year in red gives you a 10 grm in this
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example it would take 10
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years for the property to pay for itself
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based on the gross rent multiplier the
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inverse of this method is used to
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determine an investor's value
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of the property if you want your
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property to pay for itself in seven
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years you would use a
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grm of seven so as the investor you
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would take the gross revenues of the
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property that you're looking at
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and multiply that number by your gross
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rent multiplier of seven
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so using that previous example an
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investor would multiply the
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ten thousand dollars in annual rent
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times seven
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for a total investment value of seventy
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thousand dollars
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this number is a bit more subjective
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than the others as different investors
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will apply
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different grms when looking at assets so
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it's just not as commonly seen as
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cap rates or sales comps now one thing
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to keep in mind
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the market at the end of the day the
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market ultimately determines the value
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of a commercial property even if you're
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determining value based off of recent
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sales comps
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market cap rates or other methods the
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property is only worth
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what a buyer is willing to pay for it
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that's why you'll see some properties
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sell for more or less than you feel
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they're worth the timing and acquisition
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or disposition can be everything so
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there you have it for today's video for
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more
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investment strategies leasing and
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management tips market updates and more
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smash that subscribe button hit the like
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button if you like this video and leave
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me a comment if you have any questions
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on how to value commercial real estate
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