Evaluating Commercial Real Estate
So you are new to the world of Commercial Real Estate Investing? Not a problem! The first thing you will understand is the different methods used to evaluate a potential Commercial Real Estate acquisition. It doesn't matter if you are wholesaling or buying to hold, it all starts with the evaluation.
Sounds pretty complicated, Right? Well it really isn't. There are three different ways to evaluate Commercial Real Estate.
Three Methods to Evaluate Commercial Real Estate
1. Sales Comparison method
a. This method is synonymous with residential real estate where they evaluate properties based on comparing like properties. Comparisons and adjustments are made for like and non like features and amenities.
2. Cost of Replacement Method
a. This method is used for non-income producing properties like churches where they value the property based on what it would cost to rebuild today. It is based on the cost of materials, labor and the wear and tear (depreciation) on the structure.
3. Income Capitalization Method
a. This method is the standard for the industry. The future cash flows dictate what the present value should be and what an investor is willing to pay for the property.
Income capitalization converts anticipated cash flows into present value by capitalizing net operating income by a market derived "capitalization rate (CAP)".
We will explain the Income Capitalization Method Below!
Commercial Real Estate Income Capitalization Method
There are three variables that are needed to accurately evaluate a Commercial Property Acquisition using this approach.
1. CAP Rate: Measure of the income produced by a property divided by the cost of the property
2. Net Operating Income (NOI): Gross Rents minus expenses
3. Value of Property: NOI divided by the CAP Rate
With any two of these variables you can obtain the third with some simple multiplication or division.
For example: If a property is purchased for the price of $1,000,000.00 and the property produces an annual net operating income of $100,000.00 then the CAP rate of the property is 10%.
Net Operating Income: $100,000.00
Purchase Price: $1,000,000.00
CAP rate: 10%
So in the scenario above, let's say that I am interested in facilities that need a little work (Class C) in the inner cities. The market CAP in those areas is 12% and that is what I want to buy at. I will take the NOI on the property and divide it by the CAP rate to determine my max buy price.
Net Operating Income: $100,000.00
CAP Rate: 12%
Maximum purchase price: $833,333.00
Article Source: http://EzineArticles.com/?expert=Nathaniel_Stewart
Article Source: http://EzineArticles.com/6025484
So you are new to the world of Commercial Real Estate Investing? Not a problem! The first thing you will understand is the different methods used to evaluate a potential Commercial Real Estate acquisition. It doesn't matter if you are wholesaling or buying to hold, it all starts with the evaluation.
Sounds pretty complicated, Right? Well it really isn't. There are three different ways to evaluate Commercial Real Estate.
Three Methods to Evaluate Commercial Real Estate
1. Sales Comparison method
a. This method is synonymous with residential real estate where they evaluate properties based on comparing like properties. Comparisons and adjustments are made for like and non like features and amenities.
2. Cost of Replacement Method
a. This method is used for non-income producing properties like churches where they value the property based on what it would cost to rebuild today. It is based on the cost of materials, labor and the wear and tear (depreciation) on the structure.
3. Income Capitalization Method
a. This method is the standard for the industry. The future cash flows dictate what the present value should be and what an investor is willing to pay for the property.
Income capitalization converts anticipated cash flows into present value by capitalizing net operating income by a market derived "capitalization rate (CAP)".
We will explain the Income Capitalization Method Below!
Commercial Real Estate Income Capitalization Method
There are three variables that are needed to accurately evaluate a Commercial Property Acquisition using this approach.
1. CAP Rate: Measure of the income produced by a property divided by the cost of the property
2. Net Operating Income (NOI): Gross Rents minus expenses
3. Value of Property: NOI divided by the CAP Rate
With any two of these variables you can obtain the third with some simple multiplication or division.
For example: If a property is purchased for the price of $1,000,000.00 and the property produces an annual net operating income of $100,000.00 then the CAP rate of the property is 10%.
Net Operating Income: $100,000.00
Purchase Price: $1,000,000.00
CAP rate: 10%
So in the scenario above, let's say that I am interested in facilities that need a little work (Class C) in the inner cities. The market CAP in those areas is 12% and that is what I want to buy at. I will take the NOI on the property and divide it by the CAP rate to determine my max buy price.
Net Operating Income: $100,000.00
CAP Rate: 12%
Maximum purchase price: $833,333.00
Article Source: http://EzineArticles.com/?expert=Nathaniel_Stewart
Article Source: http://EzineArticles.com/6025484
No comments:
Post a Comment