Residential & Commercial properties’ valuation.
My experience in real estate and interaction with various players mostly investors has necessitated writing of this article on difference on residential and commercial properties’ valuation. Like I always say, failure in real estate investments is not because of mathematical errors but due to lack of adequate, reliable and factual information when making these investment decisions.
According to most people, buying and selling a property is what makes the real estate world one of the most high-flying and busy investment sections.
Nonetheless, a real estate asset can be of different kinds, and they have different intentions. Depending on the asset’s location, type, other aspects and demand, the value of the asset may vary. Thus, it’s paramount that you go for a detailed property valuation prior to buying or selling it.
Residential Real Estate
I define residential properties as single-family homes, which are normally bought as home/residence by their owners to dwell in.
Normally, prices for residential properties are gotten using a few different comparable sale methods. These comparable sale methods are performed using cost per square foot, floor plans or construction cost. These valuation methods are also considered for a variety of residential homes including duplexes, villas, bungalows etc.
Assume a home sells in your area for kshs.8,500,000 having two bedrooms each with a bathroom attached. And it is identical to your home in space and style. Now, when you go to sell your home, the selling agent will most likely tell you that it is worth Kshs.8,500,000 after looking at the comparable sale price.
Henceforward, residential property valuation is clear-cut and comparatively effortless to perform. Take a brief note of the identical homes and at what prices they were sold thereafter adjust for any disparity and you can speedily unearth the value.
On the other hand commercial real estate properties generate income. They contain apartment complexes of units or offices, retail or industrial properties. These properties are owned by investors by and large for rental income. These investors don’t reside there, but they rent out these spaces to tenants who pay them rent every month for their space.
Noteworthy, the value of a commercial real estate is calculated on the basis of the income it makes.
To calculate the income, you need to consider the income from the rented space and deduct the operating expenses. Here, income taxes and loan payments aren’t considered. The amount that remains is known as Net Operating Income.
It is important to know how to calculate the Net Operating Income if you want to invest in a commercial real estate.
Commercial property’s value is decided on the basis of how much an investor is ready to pay for the Net Operating Income. The investor utilises their investment funds for the property’s income. And the rate at which the income pays back to the investor for their investment is known as Return-On-Investment (ROI).
Value = Net Operating Income/Desired Return
Let’s look at an example to understand better;
Suppose, an investor is looking to buy a retail property that has a Net Operating Income of Kshs.9,000,000. Assuming in that region, investors are willing to purchase properties like this for a 10% return-on-investment.
The property value would be worth kshs.90,000,000. The value is calculated by taking the Net Operating Income and dividing it by the desired ROI (Kshs.9,000,000/10%= kshs.90,0000,000) for investors in your surrounding area. This means, if an investor were to invest kshs.90,000,000, then he would anticipate receiving a 10% return on his investment amounting to kshs.9,000,000 year after year.
It is as simple as that, now you know.
Important to note, always use commercial property valuation method prior to buying or selling a commercial property as it provides an accurate property value.