Deciding whether or not to invest in a commercial real estate property is a very intensive process. Commercial real estate investment often requires more upfront capital than residential properties do, so you want to be sure that you’re in a good position to get a solid return on that investment. The most important decision you’ll have to make is how much you’re willing to pay for your new investment property. There are multiple ways to come up with a value on a commercial property, but they all should lead back to one thing: the bottom line.
Income Capitalization Approach
The ICA of property essentially revolves around one factor: the amount of income the investor can expect to derive from a particular property. To determine the Income Capitalization rate of a property, the investor can study other local, similar properties while factoring in the anticipated maintenance costs and depreciation.
Sales Comparison Approach
Often referred to as the “Market Approach,” the Sales Comparison Approach mostly relies on the data provided by recent sales of similar properties within a given area of a property. While it’s difficult to find commercial properties that are mirror images of one another, investors can work with a Realtor to collect data about properties that are similar in square footage and other amenities that have recently sold. That should at least provide a basis for how much of an initial investment an investor should make.
Value per Gross Rent Multiplier
This is usually referred to as the Gross Rent Multiplier or GRM. There’s a simple mathematical formula used to determine the GRM of a property. You simply take the price of the property and divide it by the gross income it produces. If the subject property’s GRM falls between 4 and 7, it is typically considered a sound investment.
Cost Approach
The Coast Approach is typically only used when you can’t find any comparable properties. To determine the cost approach, you consider the value of the actual land where the property sits and figure out the cost if you tore down the building and built it back from scratch.
Whatever your method is, the only thing that matters is finding an investment property that is more likely to put you in a position to make the most money—best of luck in your investing.