Rock Bottom Blueprint Property Investment Analyzer

In commercial real estate you will be dealing with complex numbers and formulas during your discovery and due diligence phase.  Unlike its residential counterpart, you are going to need some sort of software to assist you in your evaluation.  But before we go there, we need to understand the three different ways that commercial real estate is evaluated and when the different methods are used.

But don’t worry, if you read on Rock Bottom Blueprint will give you a link to a property investment analyzer you can use to evaluate your deals as a bonus for sharing with us at Rock Bottom Blueprint.

How to Analyze and Evaluate Commercial Real Estate

1. Comparing Like Properties
   1. Just as the name implies, with this method we are looking at like properties that have sold and make adjustments to the price made on like and non-like characteristics of the property.  This method is used heavily in residential real estate.

1. Replacement Cost of the Property
   1. Not all commercial property is income producing.  A church, for example, is a commercial asset that can’t be evaluated by the income it produces because that is not its function.  It also can’t be evaluated by comparing like properties because there just aren’t enough like property sales to compare it to. So what do we do?   We derive a value based on the cost of materials to rebuild in today’s market, the labor costs, as well as adjustments for the wear and tear (depreciation) of the building.

1. The Income the Property Produces.
   1. I’m not going to get technical here and give you the text book definition because it might confuse a lot of you.  Essentially, the cash flow from income-producing properties are one of the main factors that drive the price of that property.  The more income it produces, with all other things being equal, the more it is worth.  We have another article that drives into the technicalities of this approach.

We will explain Rock Bottom Blueprint’s Income Capitalization Method Below!

Property Investment Analyzer 101

When evaluating a commercial asset, there are three variables that need to be discovered.

1. Capitalization Rate (CAP):  All this really is, is the income produced by the property divided by the cost to purchase the property.
2. Net Operating Income (NOI):  This is the Gross amount of income produced by the property minus all of the expenses before you pay the note.
3. Value of Property:  This is a combination of the two above.  Divide the NOI by the CAP Rate to achieve this number.

So am I saying that all three of these variables are co-dependent?  Yes, that is exactly what I am saying.  You can get the third variable as long as you have the other two. www.rockbottomblueprint.org

So let’s crunch numbers.  Remember, commercial real estate investing has many tools and gadgets you can use to run these numbers in the matter of seconds.  But today, we are going to do it by long hand.

Let’s say we buy a facility for $2,000,000.00 with an NOI of $200,000.00.  $200,000 / $2,000,000 is 0.10 or 10%.  The CAP Rate on this property is 10%.

NOI:  $200,000.00

Cost:  $2,000,000.00

Capitalization Rate (CAP): 10%

Example:  I am interested in nice Class A type facilities in beautiful areas.  The market in those areas for the type of facility I am looking for demands a 5% Cap Rate.  If I take the NOI and I divide the NOI by the Cap Rate, it will give me my max price to purchase this particular facility.

NOI yearly:  $200,000.00

Capitalization Rate:  5%

Max Buy Amount:  $4,000,000

And there you have it.  This facility is worth $4,000,000 in the market as it sits.  Oh, before I forget, to get more information on how to evaluate deals, along with your bonus property investment analyzer created by Rock Bottom Blueprint’s good friend Dutch Mendenhall, please go to www.rockbottomblueprint.org

Thanks for joining us and we will see you next time,

Randy Rider

Rock Bottom Blueprint Property Investment Analyzer