There are many terms that commonly used in the property industry and one of them is commercial real estate valuation. If you are not familiar with the term, here all you need to know about it.
The Term’s Definition
Commercial real estate valuation is actually property used for business purposes and produces income. In other words, you can say that this term refers to property that comes with potential income. As it is widely known that the net income gained in the future, as well as the eventual return of what has been invested, are the main benefits of the commercial property owned by those involved in the real estate industry. The worth of the property will be based on the earning capacity that it generates per year.
The Approaches Used
Basically, there are three different approaches that mainly used to help business owners to value their commercial property.
- Cost Approach
This refers to the cost of the land along with the replacement cost needed for improvements. The cost is also minus the depreciation of the property’s functional and physical. To determine the value of the land, it can be done by studying the current land sales for the places found around the subject’s property.
- Market Approach
The second approach used to value commercial property is the market approach. This approach puts its main concern on the current sales of comparable properties. However, the properties compared do not need to be in similar physical characteristics. This is the market conditions and terms of sale that should be in the identical condition. This is aimed to make it easier for business owners to make an adjustment for the comparison.
- Income Approach
Last but not least is the income approach. The commercial real estate evaluation by using the approach just needs simple formula. The value that equals the NOI (Net Operating Income) is divided by the rate of capitalization. The formula is used to examine the connection between value and NOI by using cap rate.
Commercial Real Estate Value in Excel
Excel comes with the commercial real estate valuation model template to allow the users to value their commercial property quickly and in more effective ways. The commercial properties that can be valued by using the template model of Excel include industrial site, storage, office building, retail building, and logistic. The valuing process of the commercial property is done by using a DCF Valuation. So, what is DCF Valuation? Well, this is one of the most powerful methods currently used in commercial real estate valuation. The method is considered effective since it mainly focuses on the cash flows that are expected in the future. The analysis of the future cash flows could be derived from the commercial property valued. The template model offered by Excel will help the users to forecast net operating income, the project expected operating expenses, analyses remaining contract rent, estimated rent roll, and more. In this way, the users of the template model will be able to get a complete understanding of how their commercial property is priced.
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