So just what is commercial real estate? The next question you might have is what is investment real estate? Sometimes they are the same and sometimes they are not.
Commercial real estate is generally defined as any property that is used for the purpose of commerce. For example, an office building, a warehouse, retail store, shopping center or an apartment building with five or more units. Investment real estate is generally defined as property that is purchased for the income it produces. This can range from the purchase of a single-family home that is used as a rental, to a major shopping mall or office tower. It does not include the home you own and occupy.
While the valuation of a single family home is most often established by the sales of comparable homes in the same area, larger commercial property is usually valued by the income it produces. The more money it makes, the more it is worth. Simple, right? Well, sort of. Let’s start with an explanation of the general process of real estate valuation.
Keep in mind that what an appraiser says is defined as “an opinion of value based on supportable evidence and approved methods.” It is important to understand that the appraiser does not establish a property’s worth but rather verifies what the market indicates.
There are three processes of valuation an appraiser will use to determine the value of any piece of real estate. These three processes are:
Cost – The cost to build a similar piece of real estate.
Market – Based on the closed sales of similar properties in similar condition and areas. This is called the comparable or market value.
Income – The property value based on the net operating income the property produces. An appraiser will use all three processes, but select only the one (or, at most two) that most accurately reflects the market value. They are never averaged.
As an investor in real estate, you will be particularly interested in the Net Operating Income (NOI) in order to determine a property’s worth to you.
Here is an easy way to compute the Net Operating Income:
Start with the total income that would be generated if the property is fully occupied. Then subtract any money lost due to vacancies, uncollected rents or other credit losses. The remainder constitutes the money available to operate the property. From this figure, subtract all operating expenses, such as routine maintenance and property taxes, and then what is left is called the net operating income (NOI).
About The Sundance Company
The Sundance Company has become a development powerhouse with more than 30 years of successful history in Idaho’s Treasure Valley and the Boise metropolitan area. The Sundance Company is one of the few local companies that self-manages and maintains its own properties—enjoying higher occupancy levels and superior quality control for its projects.
Savvy tenants and buyers look to The Sundance Company for development; office, warehouse, and retail leasing; property management; build-to-suit/construction; and land and building sales. With more than 1.5 million square feet of prime office and industrial space in the greater Treasure Valley, The Sundance Company has the size and diversity to avoid the need for a “one-size-fits-all” approach—thereby assuring customized solutions that are genuinely tailored to each client’s needs.
Every project by The Sundance Company is conceived and executed with integrity, innovation, accountability, and dedication by a team of seasoned experts who always remains mindful not only of tangible aspects of a property transaction but also the intangible. The in-house management team values its personal connections and the relationship of trust it has created with its tenants and property owners, which include national and regional companies, some of whom have been in Sundance buildings for more than 15 years.