When it comes to commercial real estate investing in Chicago, it is crucial to be able to accurately and efficiently calculate the value of a property. Without an accurate value of the commercial property of interest, it’s extremely difficult to determine how the property will perform as part of a portfolio. While property valuation tends to have a bit of a learning curve, it gets easier with time, and luckily, we are here to help.
Why is Commercial Property Valuation so Important?
The most obvious reason why the value is so important to commercial real estate investing in Chicago is that it tells you the most probable price a property would sell for on the open market in the present day. In addition, an accurate property value is important for underwriting and is required when placing debt on a property. In general, most lenders want to see around a 65% to 70% loan-to-value ratio before signing off on a mortgage.
Finally, for investors in value-added properties, it’s important to have a correct valuation in order to determine the total budget. For example, if someone is looking to add thousands of dollars in renovations to a property, it may not be worth it for a property that is accurately-valued at less than they were expecting.
Best Practices
When considering an approach to commercial property valuation, there are a handful of options such as sales comparison, cost, income, and the gross rent multiplier. The sales approach, often referred to as the “market approach,” involves looking at comparisons and recent sales data to value a property. The cost approach calculates how much it would cost to build the property from scratch.
The income approach is typically the most frequently used technique for appraisal and is based on how much income a property would generate in the future. Finally, the gross rent multiplier(GRM) approach takes the price of the property and divides it by gross income. Many people describe this method as a “back of the napkin” approach to valuation because it is so quick and easy.
A smart appraiser usually uses more than one approach and takes an average, rather than selecting just one. It takes time to learn the best way for you to value commercial real estate, but it may get easier with time. If you need more tips for successful Chicago commercial real estate investing, contact us today!