3 Ways to Value Commercial Real Estate
Replacement Cost Method: As the title implies, this is the method of evaluation that estimates the cost to reconstruct a replacement to the existing structure. It takes into account the cost of materials, labor and the current wear and tear (depreciation) on the current structure. This is very effective for evaluating a newer structure that has constructed and has very little depreciation.
Sales Comparison Method: This method is commonly referred to as the “Market Approach” and is the method that analyzes prices paid for recent sales of similar properties in normal market conditions. Adjustments are made to valuations based on positive and negative characteristics of the similar properties as compared to the subject property.
Income Capitalization Method: This method is the process of estimating the value of a property by discounting the value of all future net income from the property. This method is commonly used for property considered for investment purposes. The 2 key variable sin this analysis are how accurately one can predict the future net income by taking into consideration the variables of rental rates, vacancy, taxes, related expenses etc. as well as the current cost of capital of the investor.