Buying commercial or multi-family property is all about the numbers. There is an expression in real estate that you make your money at the point of purchase. The investment has to make financial sense now, given the asking price and the expected return on investment. Gone are the years of the real estate bubble of 2006-2008 when high prices on residential properties were justified by the appreciating-by-the-month property values.
The value of the commercial property is calculated based on actual numbers. Remember, that when you borrow the money for an investment, the lending institution becomes your investment partner. Since lenders want to protect themselves from bad investments, enter the appraiser. Depending on the lender’s policy, a commercial property appraiser might be required to have specific designations, ensuring the quality of their opinion. Commercial and multifamily property appraisals are more time consuming than residential, so 60-90 days escrows are a norm in the industry.
When performing an appraisal, appraisers calculate the following:
Cap Rates: every city can be divided into smaller pockets of real estate markets within its larger boundaries. Properties in one pocket could have higher values than properties in the next neighborhood, which means that similar property type investments located within each pocket should be expected to yield a reasonably similar cap rate – net operating income divided by market value* ratio.
* A good broker will market the property at its market value, but there is no restriction on how much the seller could ask for his or her property. The closer the asking price to the market value, the better investment you are getting.
Rentals: rent could be over or under market, or at the market value. Relationship between the market rent and the subject property’s rent impacts the rate of occupancy and the tenant turnover. (If the rents are currently under market, then there is a room for an increase, and a higher rate of occupancy as compared to the comps in the area). Tenants will be asked to verify the amount and the terms of their rent through the estoppel certificates.
The cost of multi-unit property appraisals is $150-$200 per unit or more, but some lenders charge a flat fee if the appraiser is on staff, versus an independent contractor.
Fees for commercial appraisals vary with the purpose and the size of the property. The cost is anywhere between $1,500-$3,500 and more.