Investment real estate values really come down to the income stream a property produces and office buildings are no exception. What appraisers do is compare income streams that properties produce versus comparing bricks, mortar, wood, etc. They do use three kinds of methods to value property: the comparable approach, the cost approach, and the income approach. Keep in mind with office buildings and other investment real estate, appraisers will rely 80-90% on the income approach to value.
So, let’s say you’re looking at a 5,000 square foot office building that’s about 20 years old. This is the fourth or fifth office building you’ve seen over the last few months that is of this age, location, condition, etc. After you’ve analyzed the other four or five office buildings, you’ve noticed that they’re consistently being offered at a 10% capitalization rate (Net Income Divided By Purchase Price) So, what that tells you is in the market right now, a 10% “cap” rate is pretty much what the properties are selling for.
So, back to our other office building in question. After you’ve analyzed this particular office building, you find that this is being offered at an 11.5% cap. That could mean opportunity. Remember, the higher the cap rate, the more profit you’re going to have and if comparable office buildings are being offered at a 10% cap while this one is being offered at a 11.5% cap, what that means is you could potentially have a profit. It also means you need to look carefully to make sure the owners aren’t leaving any financial information out, but it could be worth pursuing. On the other hand, let’s say the office building in question had a 7% cap, while similar ones had a 10% capitalization rate. Right away, you know that the property may be overpriced (because the comparables are at 10% cap rates) With that low of a cap rate, that means they’re asking much higher for the property than what comparable properties are being offered for. However, it’s worth looking at the property (remember the section on looking beneath the surface), to see if it’s worth pursuing. But, with the thought in mind, it may be overpriced in the first place.
Make no mistake; it’s not difficult putting income and expenses together for a commercial property. I mean, after all, it’s not that difficult to figure out what the income is and what the expenses are. So you may be wondering, why do I even need this worksheet in the first place? Well, the main reason you need the worksheet is to make sure you have an accurate analysis of the property mainly from an expense standpoint.
commerical real estate Special offer to help you make it in the commercial real estate world right now.http://www.commercialprofitblueprint.com
Jacquelyn Donner
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