LA is home to nearly 250,000 small businesses, making it the perfect place to invest in commercial property.
When entering a bustling real estate market like the commercial market in Los Angeles, doing your due diligence is necessary. Competition is fierce and if your property is going to give you good returns, you need to make sure you're not over-investing or missing the market with rent pricing.
A commercial property valuation is the first step in any commercial real estate transaction. In today's post, we'll give you some property investment tips and valuation techniques so you know what you're getting yourself into. Keep reading and maximize your commercial real estate investments.
Market Value Approach
The simplest approach to evaluating commercial real estate is to examine the local market. It involves looking at other commercial properties in the same market that offer similar functionality.
It's an approach allowing you to quickly establish a range of values you can analyze and work with. You can also easily tweak the valuation depending on your property's unique quirks. The market value approach offers buyers a quick starting point for negotiations.
Income Approach
The income approach helps you determine the value of a property based on how much income it brings in each month. You can calculate the income by using the "cap rate". Divide the net operating income by the property's sale price.
If your property can generate a predictable income, this is a very useful method. This said, you're not accounting for extra costs, like regular maintenance/repairs, vacancies, and collection loss from poor tenants.
Cost Approach
This is also known as the "replacement cost approach". It evaluates the value of the land the building sits on and looks at the cost of building an identical building on the property. You also consider the depreciation of the existing property.
While this method takes a more in-depth look at the value of the land, it fails to consider anything the other two methods do. This is a valuation method that should be used in conjunction with the other methods.
Pricing Your Rental
How much rent you can bring in each month is a major factor in the value of a property. You need to be careful when pricing a rental, as going too low leaves money on the table and going too high can create vacancies. Pricing it correctly will help you maximize income.
The best thing to do is examine other similar commercial properties and their monthly rates. Commercial rental valuations can be more complicated than residential ones, as there's more variability. Narrow your search to properties catering to the same tenants as yours to find an accurate estimate.
Commercial Property Valuation and Property Management
A correct real estate appraisal is an essential aspect of successful property investing. When you pay the right amount and correctly estimate your income, you can confidently approach any investment. Once you have your property, it's up to you to make sure you're maximizing ROI.
One way to do this is by hiring a commercial property manager. At PMI Los Angeles, we're the top commercial property management company in LA, offering comprehensive services including commercial property valuation, maintenance, and tenant management. Contact us today to find out more about our services.
