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What’s the Disparity between Residential Property Valuation & Commercial Property Valuation

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.

1. Residential Real Estate

Residential properties are defined as single-family homes, which are normally bought as an abode by their owners to dwell in. Normally, prices for residential properties are fixed 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.

Let’s take an example:

Assume a home sells in your area for $85,000 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 realtor will most likely tell you that it is worth $85,000 after looking at the comparable sale price.

Henceforth, residential property valuation is clear-cut and comparatively effortless to perform. Glance at identical homes and at what prices they were sold thereafter alter for any disparity and you can speedily unearth the value.

2. Commercial Real Estate Is Altogether Different

Commercial real estate properties generate income. They contain apartment complexes of ten units or more or offices, retail or industrial properties. These properties are owned by investors by and large. These investors don’t reside there, but they rent out these spaces to tenants who pay them rent every month for their space. 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. You should know to calculate the Net Operating Income if you want to invest in a commercial real estate.

Commercial property’s sales 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 glance at an example to understand:

Suppose, an investor is looking to buy a retail centre that has a Net Operating Income of $90,000. In that region, investors are willing to purchase properties like this for a 10% return-on-investment.

In this case, the property would be worth $900,000. The value is decided by taking the Net Operating Income and dividing it by the desired ROI ($90,000/10%= $900,000) for investors in your surrounding area. This means, if an investor were to invest $900,000, then he would anticipate receiving a 10% return on his investment amounting to $90,000 year after year.

Always use commercial property valuation services prior to buying or selling a commercial property as they have the requisite experience to provide an accurate property valuation.


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