Buying a location for your business gives you greater control than if you just leased the property. Still, a land purchase comes with its own risks, such as overpaying for a piece of subpar real estate. This is why you should appraise the property before acquiring it.
Commercial property appraisals come in different forms. Depending on the kind of real estate you want, one or more types may yield the most accurate figure possible.
Income appraisal
It is common for property buyers to take the income approach. This valuates property by dividing the net operating income of the property by the capitalization rate. This estimates the market value of the real estate based on income potential. However, you should be sure the net operating income and cap rate used are accurate comps.
Cost appraisal
By employing the cost approach, you look at how much it would cost to build the property from scratch. You calculate the land value plus the expenses of construction minus depreciation. This method works better for newer buildings that have not depreciated by very much.
Comparison of sale prices
The sales comparison approach looks at sale prices of similar properties. This method generally works better for personal real estate than commercial properties as you might not find another commercial property that is comparable to the one you want. Still, sometimes commercial investors use this method to at least gauge a bid price.
Gross rent multiplier
To arrive at a valuation quickly, some investors use the gross rent multiplier approach. This multiplies the gross rent multiplier for the area by the gross rental income of the property. Since this approach relies on finding reliable multipliers and rental income figures, you must find accurate values to use when making your appraisal.
An accurate appraisal requires due diligence, but it is worth the effort to avoid overpaying and ensure the property meets your investing needs.
