How can i find the value of commercial real estate

[Austin Kuritz]

Hello BP, I work with someone who owns a commercial property (14 unit) in trenton mi, 48183, brownstown township area, and i believe he's renting it way below what he could, theres a lot of value add. dont get me wrong he keeps it nice with turn overs, reapainting, flooring, etc. however there's things like heating and cooling that can be updated, the exterior still has lead paint that is pealing off. what im curious about is that i might want to see if hes interested in selling, he's close to my dad and he owned this property for awhile and self manages it so he might be more motivated tp get rid of it. i guess the question im trying to ask is how do i male sure how much the property worth. i listen to all the podcasts and read a few articles, books, etc and i know that commercial property dont go off comps but how do i really understand how much i could pay for it. also any pointers or tips are very appreciated. im also open to partner with someone to get the hang of things. looking forward to all the feedback! :-)

[Kenneth Garrett]

@Austin Kuritz

Commercial buildings are valued based on NOI (Net Operating Income). Calculate the income produced by the property and subtract the expenses with the exception of debt service (Principle and Interest). Example see below

Income - 14 units @ 700/month = 9800 x 12 (months) = 117600 (Total Income)

Expenses  58,800 

NOI = 117600 - 58800 = 58800 (Based on 50% expenses of income) Should be between 40% and 55%

Cap Rate for area is 8%,   58800/.08 = 735,000  

Here is the awesome part

Say you raise rents 3% generated an additional $3528 per year.  Doesn't sound like much does it.

Take the additional income assuming the expenses stay the same and see what happens.  Apply the 8% cap rate.

3528/.08 = $44,100.  You just increased the value by 44K without spending any money. 

If you can reduce expenses by sub-metering water lets see what happens.

$30/unit per month 30 x 14 x 12 = 5040.  You can do the same calculation

5040/.08 = 63,000. By increasing the NOI you are able to increase the value. In this example 107,100. Even with the cost of sub-metering your probably around 100K with very little work. This is the power of the Cap Rate with commercial buildings. You can also calculate the cap rate by knowing the NOI and dividing it by the asking price. 58800/735000 = 8%.

You want to be able find out from a commercial broker, commercial appraiser etc what the cap rate in the area is.

If the cap rate is 7.5% that is all the better for you.   58800/7.5% = 784,000

If the cap rate is 9% then the change is as follows.  58800/9% = 653,333.  See how the cap rate effects the value. 

Understand your market.  Same as in residential.  

Hope this helps.

Good Luck.