What is a real estate appraisal?

What is a real estate appraisal?

Do I need to get one for my commercial property?

These are two of the most common question when it comes to investing in commercial real estate. 

Similar to residential real estate, a commercial real estate appraisal is an unbiased opinion of the property’s value. A third-party professional appraiser performs the appraisal value assessment for commercial real estate, including office buildings, multifamily apartment buildings, and retail buildings.

An appraisal is also a valuable tool from an investing perspective. It gives you an idea of how much you should be willing to pay for the asset in the current market. Also, it’s good to note that lenders do not lend more than an asset is worth.

There are four different methods a commercial appraiser can use to determine the value of a property.

• Cost Approach – This method looks at the land, materials, and labor costs to determine how much it would cost to construct the same building in the current market.
• Income Approach – In this popular appraisal method, the appraiser uses standard investing calculations, such as net operating income (NOI) and capitalization rate (cap rate), to determine how much income the property should generate in the current market.
• Sales Comparison Approach – This method is used more often in residential, uses comparables, or the sale prices of comparable properties, to determine the valuation of the subject property.
• Gross Rent Multiplier Approach – With this method, you look at comparables to find the average gross rent multiplier for the area where the subject property is located.

Savvy investors search for ways to increase the value of a commercial real estate appraisal. In truth, appraisals are somewhat subjective. Investing in staging and a thorough cleaning can dramatically help. Properties in good condition have higher appraisal values. Older properties may need occasional renovations to keep them looking up to date.