How to Evaluate Commercial Real Estate

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Commercial real estate is a property used for business purposes, such as private offices, shopping malls, boutiques etc. Property investors in Canada usually feel comfortable investing in residential property, but investing in commercial real estate has become popular over the last few years, due to much higher returns, as compared to residential real estate. Since the initial investment on commercial real estate is usually very high, you must evaluate the property first to be sure that the asking price is not more than its market value. The market value of any property, residential or commercial, is evaluated on the basis of its age, location, the current economic conditions etc. Besides these considerations, you should also assess the revenue capability of the property.

Here are a few simple tips that you can utilize to evaluate a commercial real estate:

Calculate the net operating income

When calculating the value of a commercial property, the most important thing is to determine how much money the property is currently making. This will help you estimate the net income you will be able to earn from a particular commercial real estate investment. Calculate the expected total income generated by the property (in the form of rent, fees etc), and then subtract it from the expected expenditures (repairs and renovations etc). The resulting figure will be the net operating income. Since you have not yet paid taxes, you cannot call it profit, but it will give you a fair idea of how much money the property will make.

Find the capitalization rate

Divide the net operating income calculated in the above step by the asking price to get the capitalization rate of the real estate. If you are just surveying the market and do not know the asking price, you can use the Fair Market Value (FMV) to calculate the capitalization rate. Capitalization rate is a percentage value, and 6 to 10% is a fairly acceptable rate.

Calculate the value of property

Now divide the net operating income (calculated in step 1) by the capitalization rate (value obtained in step 2) and the resulting number will describe the value of the property in question.

Agree to pay more than the current value if it is a rising area

The demographics and economic conditions prevailing in the area will help you understand the trend of the value of the property in future. If it is a fast developing area, the worth of the estate will increase over time, so there is no harm in paying a few thousand dollars more than the current value.

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