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How should you determine the right price for your commercial property?

By Greg Bell

Are you trying to figure out how much your commercial property is worth with the intent of selling it on? You can use a capitalisation rate as a starting point, and also consider other valuable metrics.

Calculations

The cap rate is a quick way to estimate any potential commercial property return on investment. It should be noted that this is just one factor in estimating property value, but it's an important one. Cap rates are simple to calculate and can provide you with a ROI rate you can match to other, similar local properties on the market and use to inform your own ROI goals.

NOI

First, find your net operating income. This is the property's ROI, minus building insurance and property management fees and the capital-expenses costs required to manage it. You'll also need to include principal and interest payments on the commercial loan, as well as any and all taxes, and factor in depreciation and amortisation to arrive at the true net figure.

CAP rate

Next, determine the market value of your property by comparing it with similar properties in the same general geographical area. Once you know your commercial property's current market value, you can divide the NOI by the CMV to arrive at your CAP rate.

The latter figure can help you determine if the asking price for your property is good or if it's been set too low (or high) for the purchase to be viable for another investor. High CAP rates usually indicate a buyer's market as the housing industry slows to a crawl. By investing in commercial property or divesting yourself, you can make the most of both worlds.

Market value

You can also use your NOI and known CAP rate to determine market value of your property. Simply divide NOI by the cap rate to get your CMV.

Owners looking to sell should be careful to keep CAP rate calculations internal, especially if you're currently leasing a property. Buyers will be taking advantage of all of the information they can find about the CAP rate in making their own determinations

Potential failures of CAP

A retail shop with a particularly high cap rate based on the strength of the current tenants and the fact that leases are almost up, meaning a rent rise may be coming can artificially inflate CAP. Also, if an area is being developed by the local council into a retail centre, opening up doors through rezoning or bringing too much competition to an area, CAP rate calculations may be less accurate as a result.

Ready to sell a commercial property? We can help. Contact Ray White Surfer Paradise today.

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