Commercial properties are assessed to inform the municipality of the estimated value of the property so that they can decide on what bar to set for the tax rate. Besides that, the primary goal of a Commercial real estate valuation in Melbourne is to provide a comprehensive assessment after considering every aspect of the property. It can tell the owner or seller how much money they make on a property or what would be its return on investment. Factors like sale price, number of units, size and pending property taxes will all be taken into account.
Continue reading to find out about all other aspects involved in commercial property assessment.
What is meant by a Commercial Property Assessment?
The primary objective of a commercial property assessment is to provide a comprehensive analysis of every aspect of the property. The details of a property assessment can hold different significance among different parties. For instance, it can tell the investor how much money can be made from the property, what is its potential return on investment, and how the benefits of investing in this property differ from investing in properties of a similar nature.
It takes into consideration all aspects like square meters, sale price and such. Property assessors use these attributes to forecast the future potential of the property, for instance, what sort of income will be generated from each unit and by what percentage will it rise annually. Additionally, it also considers details like the kind of people who will be moving into the property, what is their average income high and so on. The gross rental yield is calculated by multiplying annual rental income/property value by 100.
Aspects considered under Commercial Property Assessment
A commercial property assessment considers different quantitative and qualitative data. After computing their outcome, the context of the property is also assessed before generating the final prospects. These aspects have been discussed in more detail in the following;
The Quantitative Aspect
In terms of the quantitative, numbers like potential sale price, the amount of square meters of the property, the total number of rental units available and the amount of tax owed. Besides this, any potential buyer will consider the income and expenses when looking at a property they are interested in.
The income is comprised of rent generated by each unit along with late fees and other additional charges. Expenses include costs like repairs, utilities, cleaning services, property management, property tax and insurance. The mortgage however is not factored in when calculating expenses.
Investors determine which property is worth their money by calculating the net operating income or net operating income (Income – Expenses = Net Operating Income). Properties that offer a higher Net Operating Income (NOI) are considered to be ideal properties for investing. If the NOI is zero or in negative, it means that the expenses exceed the amount of income generated. In case of a positive NOI, subtracting the mortgage will provide an idea of the actual cash flow offered by a property.
The Qualitative Aspect
The qualitative aspect considers the elements in its surroundings and how they affect the valuation of the property. Take for instance the demographics in the area; is the population experiencing a steady rise, are more people moving in, is their average income high and/or is the unemployment rate low, what is the rate of housing vacancy in the area or the median cost of living? The communal features and habituations have a significant impact on real estate values and purchasing decisions. It is critical for every real estate investor not just to consider the details mentioned on paper but also to visit the properties in person.
Assessing the narrative of a property will provide an understanding of its true potential. This is done by looking at the property’s history and how it has been used by past tenants. This part of the analysis will also take into account the previous owner of the property and the other properties that they might own. Any pending payments are also brought under review, for example, if the property owner is yet to pay off a contractor for any renovations.
These outstanding expenses will inevitably affect the value of the property. The actual potential of the property is calculated from answers to questions like the number of units available as well as the number of tenants each unit can accommodate or the range of rental income that can be expected from each property based on the current value of the market. Will the rent rise annually and how often is there a tax hike? Will the property increase in value?
The method used in Commercial Property Assessments
The 5 most common approaches used by us to conduct an assessment for commercial properties, are mentioned in the following;
- The Income Approach: Capitalisation of net income, this is where the net operating income is divided by the applied cap rate.
- Direct Sales Comparison Approach:Aspects of similar sold properties are compared with the subject property to ensure that the property has been neither overvalued nor undervalued.
- Cost Approach: This is completed by summating the depreciated added value of the improvements and adding the land value component.
- Discounted Cash Flow: A valuation method used to estimate the value of an investment based on its expected future cash flows and discounted to a net present value.
- Room Rate Multiplier: This method is part of the income capitalisation approach. By converting income into value, to determine how much income a hotel can make in the future and what its resale value will be.
A commercial property assessment usually delivers the valuation of an individual property. A Capital property advisory in Geelong can help investors by doing an investment analysis that compares one property to another, while a portfolio analysis will compare all the properties in an investor’s portfolio. The perspective provided by all these methods of assessment should be factored in when making a property purchasing decision.