3 Differences in Valuing Commercial Property from Residential Real Estate

Posted on March 24, 2020

Valuing commercial property, such as office buildings, retail centers and warehouses, is quite different from the way one would value residential real estate, which relies on comparable sales (comps) to determine a home or condo’s fair market value. With commercial property, buyers and sellers must understand terms such as cap rates, gross rent multipliers and cash-on-cash returns.

 Cap rates measure the potential return on investment investors can expect to receive from a commercial property over time, based on such factors as its location, quality, existing tenants, lease terms and rent payments. To calculate a property’s cap rate, divide its net operating income (NOI) by the asking price.

Cash-on-cash return measures the expected cash-flow of a property on a pre-tax/after-debt services basis relative to the owners’ invested equity. It can be used to gage investment performance and forecast projected earnings and expenses in the future.

Gross-rent multiplier (GRM) measures the potential income an investor can expect to receive from commercial real estate, based on the ratio of property’s sales price to gross rental income. It helps investors calculate how long it will take for their investment to pay for itself.

When evaluating commercial properties, be sure to work with experienced advisors to guide you through the due diligence process.

With offices in Miami, Orlando, New York City and Geneva, the team at Orion works with investors, developers, property owners and brokers through all phases of real estate transactions, from strategic planning and analysis to financing, negotiation, property management and disposition. For more information, call (305) 278-8400 or email info@orionmiami.com.