Understand Commercial Real Estate Market Values
One of the biggest differences between single family and commercial real estate other than the obvious number of units is the way in which the properties are valued. Residential real estate including most single family homes is valued almost always as a function of recent sales or comps. Commercial real estate by contrast is valued based upon income. The reasons for this are primarily three in number.
First residential homes are usually in a lot of company. When there are plenty of similar properties in a given area to compare to the ability to use comparable and recent sales is enhanced. It also makes the valuation of residential real estate much easier because sales trends are pretty easy to track with modern technology. By contrast commercial properties have fewer properties out there to compare to making a comparable sale model far less effective.
Second residential real estate is primarily owned by homeowners making the income production of property rather in irrelevant feature from the standpoint of assigning property value. Sure some neighborhoods have more rental homes but there are still usually enough comparable sales to determine a value that way.
Commercial properties are less often owned by someone who also lives in the property. This is more common among income properties that have 24 units but these are also typically valued similar to single family homes. Larger commercial properties are primarily purchased as investments so the income model works most effectively when valuing them.
That leads us to the last reason for different valuation and that is the type of buyer the properties most appeal to. Residential properties appeal most to owner occupants who place the greatest value upon what other homes in their area have sold for recently. Commercial properties especially larger ones are almost always purchased by investors who appreciate the importance of numbers or at least should and want values to be based upon the propertys value as an investment.
This last point is a big plus for investor purchasers of commercial real estate. We can often find bargains because properties that are expense heavy under rented value wise or both are going to be valued accordingly. Motivated owners who dont manage their expenses well or who do not perform updates that will command higher rents are often left with undervalued property.
A new owner who gets expenses under control and who brings rents up to market levels can often dramatically increase the value of a property in a short period of time. This ability is due to the income based value model for commercial real estate and is one you simply need to be aware of when looking for good deals.
About the writer: David Lindahl also known as the “Apartment King” has been successfully investing in singlefamily homes and apartments for the last 14 years and currently owns over 7000 units around the US. David regularly shares his secrets and experience on the same stage as Tony Robbins Robert Kiyosaki and Donald Trump! For two FREE copies of his highly recognized newsletter Real Estate Insights please go to http://www.davesoffer.com/ezine
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