To avoid losses and make more money in commercial properties, you should know how to assess the value of commercial properties.
The valuation of commercial properties can be more complicated than residential properties because they generate profit whereas residential properties are dwellings therefore do not generate income. Hence, the valuation of commercial properties sometimes require specific valuers.
Here are the few factors you should consider during the value assessment if you’re looking to diversify your commercial properties investment:
1. Location
First, location is the most important factor in order to determine a good commercial property investment. The location should be a high crowd area and must be good accessibility or surrounded by great amenities to the commercial property. For instance, near to medical centers or schools, near to an MRT station, train station, airport, and more.
However, if a passer-by has trouble getting access to the shop, such as people needing to go for a big U-turn to the shop, this will discourage people from getting into that shop. That is why many of the commercial properties that are situated next to main roads or highways having good visibility are less valued because there is no crowd access to the location.
2. High quality tenant
Imagine that there are two commercial properties up for sale in the market, one of which is currently rented out to Starbucks or MCDonalds, having good rental yield with a long tenancy of five to ten years while the other commercial property remains vacant and not rented out. This is a good case.
As most of the investors do not like commercial properties with high tenant turnover. Everytime a tenant stop renting and move out of the building, investors will likely have to bear a high cost such as below:
a. The cost of touching up and repair of the building for the next tenant
b. The cost of maintenance of the commercial property
c. The loss of rental during the period the commercial property remains vacant which could be for a period of up to three months or more
A high quality tenant is a tenant which upholds stable track records through economic ups and downs.
3. Previous investment performance
One of the methods to determine a good commercial investment is projected profit. But, when you use this method, there has to be businesses already operational within it.
This method is suitable for businesses such as guest houses and bars using simple measures of investment performance including cap rate, cash on cash return, and gross rent multiplier. The profit method factors in multiple profit generating characteristics that are beyond size, quality of construction and locality. However they do not take into account changes in cash flow over time, risk and the time value of money.
By the way, if you are looking for best location or great deals in commercial property investment, you may contact us for more information.
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