How to value a commercial property?

Specifically how to value an apartment building?
In Selling Property - Asked by Eric C. - Aug 3, 2010
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Answer(s)

Dan M.
Owner/Investor
Waltham, MA

Commercial property are typically valued using NOI and a capitalization rate defined by the market and/or investor. Another method is to use a simply cash on cash return analysis. A more complex method to value commercial properties is to use discounted cash flow analysis; this method allows the investor to project future cash flows using various assumptions for rental income and expenses to arrive at projected NOI and free cash flows for each year of the holding period. These cash flows are discounted to PV and added to the PV of the terminal value of the investment to arrive at a NPV and IRR for the investment. All projections are only as good as the assumptions behind them and can be dramatically effected by changes in market conditions.

Aug 3, 2010
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Michal B.
Broker/Agent
Miami Beach, FL

It's hard to answer your question as everybody looks for something else. Many people go first by cap rate (ration of NOI/price) while others might want to see their bottom number after debt service, or GRM - gross rent multiplier and compare it to similar properties in the area. If you are a novice investor, make sure you take extra time to do your due diligence to go through the leases, financial records, all service contracts, environment surveys, etc.
Another good way of learning about various ways of valuing a property is getting a copy of professional appraisal and reading it from start to finish. Derived value can be based for example on a combination of capitalized income and comparable sales in the area.
Study past sales in your area for comparable properties; translate it to price per door, study rental amounts generated per each unit type, look at their the subject expense vs. gross income ratio and ask other experienced property owners/ brokers if that is typical or somehow skewed to figure out if the NOI claimed is in the ballpark or complete off.
Hope this helps

Aug 4, 2010
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Gary T.
Owner/Investor
Albany, CA

Dan and Michael have given the best fundamental of appraising an income property if your property is a regular cookie cutter. If it has any deviation from the norm, the standard procedure will be all out the window. It requires substantial valuation experience to deal with the tough ones.

Aug 11, 2010
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