Investing in a commercial property is a major undertaking for any size of business. For some businesses, this can be one of the largest investments they will make. The commercial property will become the hub of the company’s operations. In the current financial climate, it has become even more important to make sure that resources are used in the best possible way to guarantee return on investment. Therefore, when choosing the ideal property, wise choices have to be made.
Many businesses sometimes overlook the fact that investing in commercial property is more complicated than buying a residential one. For example, the value of commercial property can be connected with income that the property generates annually. There are also factors of the age of the property, its location, use, and market trends.
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What are 4 ways to evaluate a commercial property?
1. Its location
This is a major factor which influences the value of any property, but especially commercial ones. The type of business that a company is involved in can determine how valuable that property is. Obviously, properties which are in areas with fewer people and less traffic will be valued at a lower price than those in busy areas.
Also connected with value and property location, is its physical condition, the area it is in, and any environmental issues. Also, zoning regulations should be accounted for, especially if there are plans to extend the property.
2. Compare Similar Properties
This is generally called the “Market Approach.” There are trends in all markets, and the same is true for the property market. A commercial property can be evaluated by comparing it to similar properties. This can be an advantage to a buyer because he can establish beforehand how much the property should be worth.
It should also be remembered that older properties may be more expensive to run. Therefore, the initial investment could actually be much higher taking into account extra expenses in future years. So, comparing similar properties will help establish the value.
3. Cost Approach
It can be more difficult to evaluate newer properties, unique properties, or give a value when there is little market data. In these cases, the “Cost Approach” can be useful. This estimates what it would cost to replace the property. It takes into account the value of the land and the depreciation of the property.
Commercial properties in areas of rapid development can have an inflated value. The cost approach will help evaluate the true value of the property, and give a better picture what the property will be worth when the market settles down, and demand is less.
4. Income from the property
If the property generates income then this is taken into account in the final value. After all, the new owners of the property will be receiving that income after the purchase. This is called the Income Capitalization Method. The value is worked out by discounting future net income against the value of the property.
This method of valuation should be carried out carefully as there are many variables involved, including future fluctuations in the market.
