Commercial Properties Valuation

[Mac Caspersen]

I am starting to learn about commercial and multi family investing. I am pretty analytical and have owned and sold my own business in the past, so I have a good foundation for how the math and metrics should work.

My understanding is that commercial and multi family properties are valued as a function of NOI. I have looked at probably 2 dozen properties on loop net, and all of them seem to use comps to arrive at their list price (with a couple exceptions). These are all kinds of different commercial buildings from small office to retail to self storage.

What am I missing? Where are all the valuation calculations I’ve heard of and read about?

[Immanuel Sibero]

@Mac Caspersen

You might just be missing some terminology and concepts. Valuations are always based on comparison (i.e. comps). That's how I decide where to buy milk at Kroger vs. Tom Thumb :-) My guess is that if you have sold a business, you would know that comparison of similar assets is a big part of the valuation process. Many investors in real estate (especially here on BP) have it ingrained in their heads that residential valuation vs. commercial valuation are so drastically different that they are two totally different investments. The reality is that valuations in residential and commercial properties generally use the same strategy... that is, comparison (i.e. "comps"). The thing is... what is being compared is different. For example, to value a residential home I would look at the "sales" amounts of recently sold comparable homes in the area. Similarly, to value an apartment complex I would look at the "cap rate" of recently sold comparable apartments in the area.

To answer your specific question, to calculate the probable value of an apartment complex (or self storage, etc.) I would obtain the NOI (i.e. T12) and apply the cap rate comps from recently sold comparables (i.e. apartments or self storages) to the NOI of the property I'm interested in.

Cheers... Immanuel