What is Commercial Real Estate Appraisal?
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County Appraisals in Los Angeles are used
for determining the value of the property to be selling in the current market. Typically,
lenders would not lend more than an asset is worth – hence, an appraisal helps
the lenders to determine how much financing they provide.
Hence, it is a useful tool from an investing perspective.
Before you purchase a property, it gives you an idea of how much you should pay
for the asset in the current market. An appraisal helps you make decisions
about what investments and renovation can be added to the property.
Different Methods
of Valuation
There are four different methods of commercial appraisal to determine the value of the property.
Cost Approach
Cost approach can be helpful if the building is unique or
brand new. It determines the value of the property by determining how much it
would cost to reconstruct it from the very beginning. It essentially evaluates
the land, material, and labor for determining how much it would cost to
construct the same building.
The Formula
of Cost Approach:
Land cost
+ cost of new construction – accumulated depreciation = property value
Income Approach
Income approach is the most popular valuation method for commercial real estate. Using the method of commercial valuation – appraisers use common calculation like net operating income and capitalization rate for determining how much income the property should generate in the current market.
Gross Rent
Multiplier Approach
Typically, this method is commonly used by individual
investors by professional appraisal practices. Well, it can be regarded as the
back-of-the envelope method for commercial valuations.
In that case, you need to also look at the pro forma for the
building for determining the average gross rental income of the property.
When you have the exact numbers, you can use the
following equation to figure out valuation:
Gross rent
multiplier x annual income = Property valuation
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