Commercial property valuations are calculated much differently from commonly discussed residential home prices. Determining a commercial property’s value is commonly based on its income generation, in relation to comparable cap rates. Try our commercial property valuation calculator to easily estimate and understand the approximate value of a commercial property based on its income and cap rate.
Calculate Commercial Property Valuation
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Commercial Property Value Calculator
This calculator is meant for educational purposes only. The calculation generated from this calculator does not, and is not intended to, constitute financial advice. As such, all information, content, and materials available on this site are for general informational purposes only. Please review our Editorial Standards for more info.
Commercial Property Valuation Calculation Formula
Our calculator is based on the “Income Approach” for valuing a commercial property based onits income potential and cap rate. This approach is commonly used across all major commercial real estate types such as office buildings, retail properties, industrial properties, and commercial multifamily buildings. The formula for our calculation takes the Net Operating Income (NOI) and divides it by the Cap Rate. Note that you will first need to determine total property income and operating expense values first to input into the calculator for computation.
Property Value = (Gross Income1 – Expenses 2)
/ Cap Rate (%)3
1. Gross Income – A property’s gross operating income can be calculated as the property’s total monthly income that it brings in. This typically is mostly monthly rent paid by tenants occupying the property, but can also include any other income the property generates such as parking rent, storage rent, cell tower rent, laundry room rent, late fees, and more.
2. Expenses – Operating expenses include the costs of running and maintaining the property, including property taxes, repair costs, insurance premiums, legal fees, utilities, janitorial fee, and more. Try our property maintenance expense calculator to determine estimated annual costs for maintenance and repairs.
3. Cap Rate – Cap rate is the net operating income of a commercial rental property, divided by its current market value. They are determined by similar property types and the property’s local market. Check with a local commercial real estate professional to find out local cap rates and try our rental property cap rate calculator.
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Commercial Property Valuation Resources
Commercial Real Estate Valuation Calculator FAQ
What is the “Income Approach” and its Alternatives?
The “Income Approach” to commercial real estate appraisal and valuation is a method that estimates the value of a property based on the revenue it generates. This approach primarily considers the net operating income (NOI) of the property, which is the income after operating expenses, and applies a capitalization rate (cap rate) to determine its current value.
Alternatives to the Income Approach include the “Sales Comparison Approach,” which estimates value by comparing the property to similar properties that have recently sold, adjusting for differences, and the “Cost Approach,” which calculates the cost to rebuild the property from scratch, including land value and depreciation. Each approach has its strengths, with the Income Approach being most effective for all types of income-producing rental properties, while the other methods may be more suitable for unique or non-income-generating properties.
What Affect the Value of Commercial Properties?
Several factors can significantly impact the value of commercial properties. While rental property calculators can provide a good estimate, understanding these factors if vitally important for investors, appraisers, and property owners. Below is a table outlining key factors that influence commercial real estate values:
| Factor | Description |
|---|---|
| Location | A property’s location is a primary determinant of value, with properties in high-demand areas typically commanding higher prices. |
| Income Potential | The property’s ability to generate income, including rental income and occupancy rates, directly affects its value. |
| Property Condition | The age, architectural style, and current condition of the property, including any recent renovations or upgrades, play a significant role in determining its value. |
| Market Trends | Real estate market trends, including supply and demand dynamics, interest rates, and economic conditions, can influence property values. |
| Tenant Quality | Long-term leases with reliable tenants can increase a property’s value, while high tenant turnover or vacancies can decrease it. |
| Accessibility and Visibility | Easy access to transportation, good visibility, and ample parking can enhance a commercial property’s value. |
| Zoning and Land Use Regulations | Zoning laws and land use regulations can affect how a property can be used, impacting its potential value. |
| Comparable Sales | Prices of recently sold similar properties in the area (comparables) are used to gauge the market value of a property. |
