What is a property worth?
Real Estate Calculations
There are many approaches to determining the value of a piece of commercial property or commercial investment. Often it is best to use a more than one approach to reach the true value of a property. Below are few of the most common methods for determining the value of commercial real.
Values real estate based on "what would it cost to replace the building in its current form with the value of the land added to it?" The cost approach sounds like a straightforward and easy-to-calculate method for determining value, but it is difficult to implement. Getting an apprised value for the cost of the existing structure can be difficult in some markets. Furthermore, the market value of the existing prosperity may be very different from its construction cost.
Sale Comparison Approach
This approach looks at the price at which other real estate property with similar characteristics (location, size, age, etc.) has recently been sold or valued. Most residential real estate is appraised or valued using this method. At times, this can also be a difficult method to implement: a comparable property may be hard to identify (especially if the property in question has unique features) or there may not be any sales of comparable properties in the recent past.
The Income Approach
This approach uses a perpetuity discount type of model. The net income derived from the property is discounted at a market required rate of return. The appraisal value = net operating income (NOI)/market cap rate. The Market cap rate is found by benchmark NOI/benchmark transaction price. The problem with this approach is that long-term tenants may not be paying current market rates, depressing the value of the investment. An inflationary environment may also take a bite out of the value of the property.
Discounted After-Tax Cash Flow Approach
Calculating the value of the discounted cash flows from a real estate investment can act as a validation or check on other valuation methods. This approach takes into account the investor's individual tax bracket, depreciation and any interest payments.
Calculate Net Operating Income from a Real Estate Investment
It is often helpful to know the Net Operating Income (NOI) for a property or know who to figure the NOI of a property. The following is a brief outline of the proces
Potential Gross Income
Scheduled Rent $120,000
Other Income $15,000
Total Potential Gross Income $135,000
Vacancy and Collection Loss (10%) ($12,000)
Effective Gross Income $123,000
Total Expenses $10,000
Comparable Property: NOI $115,000, which sold for $1,210,000
NOI/(Transaction Price): $115,000/$1,210,000 = 0.095 (9.5% cap rate)
NOI for Subject Property = $123,000 - $10,000 = $113,000
NOI/Cap Rate=$113,000/0.095 =$1,189,000*= Which is the amount this property is being valued at.