How to calculate the true value of a commercial property which provide steady stream of rental income for the investor?

In our blog post titled “How to calculate the true value of the property”; we primarily focused on valuation of a residential property. In this post, we will however, focus on valuation of commercial properties which provide steady stream of rental income for the investor. This valuation approach is based on the principle that the value of a property is related to its ability to produce cash flows. For this approach 3 techniques are commonly discussed.

Gross income multipliers are relationship between gross income and the sale prices for all comparable properties that are applied to the subject property.

Gross income multipliers (GM) = Sales Price/Gross Income

In arriving at a value for the subject property, the appraiser must develop an estimate of gross income based on the market data on comparable commercial properties. For the comparable properties the gross income should be annual income at the time the property is sold. Some appraisers use potential gross income (which assumes all space is occupied). Others use effective gross income (potential gross income less vacancies).  Since this method relies on gross income, therefore an assumption is made that the operating expenses are about the same proportion of gross income for all properties. This method relies heavily on current market transactions involving the sale of comparable properties. These techniques resemble the sales comparison method for valuation of a property discussed in the previous section in many ways. The focus of these techniques is to determine a market value that is consistent with prices being paid for comparable properties trading in the market place. However, rather than giving priority to adjusting for differences in value by adding and subtracting directly from the prices of comparable properties for physical and location attributes, these two methods tend to focus first on the income producing aspect of comparable properties relative to the prices at which they were sold. Adjustments are then made for physical and location dissimilarities.

This technique is similar to the Gross income technique except that it considers net operating income (NOI) rather than the gross income of comparable properties. When it is suspected that differences in operating expenses exist between comparable, the focus of the analysis should be shifted from gross income to NOI.

Capitalization Rate (cap rate) R = NOI/Sales Price

Following data should be collected to calculate capitalization rate:

Sale price, rent, and operating expenses should be collected from brokers, agents who were involved in the sale of comparable properties.

Important warning: both Gross income multipliers and cap rate approaches does not assure that the property will be a good investment if purchased. They only assure the buyer that it is a competitive market price and that if the method is applied correctly, the buyer is not overpaying or underpaying for the property relative to what other investors have paid for similar properties. The question of whether or not it is a good investment will depend on the future growth in rents, income, and property values.

  • Discounted present value techniques

This income approach is based on the principle that investors will pay no more for a property than the present value of all future NOIs. Based on the knowledge of market supply and demand, lease terms, as well as income and expenses, a forecast for cash flow is developed for a period for which we have knowledge regarding supply and demand, lease terms, income, and expenses. Normal forecasting period are 10 years.

  1. The first step in this technique is to forecast NOI (based on market supply and demand, lease terms, and expenses)
  2. The second step is to select a relevant period of analysis or the holding period for the investment.
  3. The third step is the selection of a discount rate (r) – this discount rate is the desired return for the real estate investment based on its risk when compared with returns earned on competing investments and other capital market benchmarks.
  4. Present value of expected NOI beyond the holding period. These cash flows are represented with reversion value (REV) or resale price.

Presently, capitalization rate method is used in India when evaluating the worth of the income generating properties. The discounted present value method relies on assumptions about demand and supply and therefore, there are possibilities of arriving at the wrong value of the property. 

Now, whenever you as an investor are looking to sell your commercial property such as office space or retail outlet, do your calculations as explained by us and make sure you get the right value of your property. Alternatively, if as an investor, you are looking to buy a commercial property, make sure to do these calculations in order to ascertain that you are not overpaying.

In a nutshell:

Did you calculate the true worth of your property before selling?? Let us know at nirrtigo@nirrtigo.com

2009 Most Read Investment Property Rumours

Well folks, as 2009 draws to a close we thought we would dig about in our statistics and see exactly what was popular this year as far as rumours in the real estate world were concerned.

A couple of the articles were removed so instead we have linked back to the page we published explaining the reasons, it goes to show though that the articles in question were correct and accurate at the time, and still are now.

We have linked the titles into the pages for easy ready reading. feel free to comment if you wish (no swearing please!).

2009 was a tough year for the industry, many companies have simply closed, many however opting to just disappear altogether or failing that just hide and not answer the phone!

We hope here at the Investment Property Rumour Mill that we have provided an informative insight into what happens in this industry, and it would seem a few of our predictions have been correct. As for 2010, we should start to see some recovery for the most part by the summer providing the bankers of the world don’t make another mess, and the media decide not to shoot everyone in the foot with their doom and gloom!

Top tip for 2010? If you are going to buy abroad, it would still seem Brazil is the place to go. The 2016 Olympics will ensure the influx of international trade and investment for some time to come, with any luck Brazil will make the most of it. If you do buy though, don’t just buy for the sporting factor. Nice as it is at the time, most resorts will not stay sustained after the event. The main cities though will. Bear in mind the oil and gas fields in the country that have yet to be developed which will provide income for many years to come.

Top Investment Property Rumours!

Fortuna Land and Oanna Group – How It All Started
MRI Overseas Property Wound Up
DCC Property – The New Macanthony Realty International? (*)
Riding The MRI Construction Farcical – Bait and Switch Part 3
Ocean Estates – The Poseidon Adventure?
VAT is going on in the Bulgarian furniture world?
Vila Verde – The Great Bait and Switch – Part 1
Red Hot Homes – Some Scams Dont Know When To Stop
Instant Access – The Scam Continues
Fractional Ownership – Pros or Cons?
MRI – Strange New Marketing Tactics
Investment Property Bargains in the USA?
What Happened To Viva Estates?
Sad Day For The Rumour Mill
MRI – DCC – Solutions Overseas – What Next? (*)
We Get Heat – Not The Sunshine Variety
The Great Bait and Switch – Part 2 – Investment Property Spin
Exclusive Interview – Chris McCarthy – VIVA Estates
DAMAC Downsizes – Rumour Confirmed
Another Mysterious Inside Track

The above are just the top 20 posts this year, there are plenty more in the archives. Those marked above with a (*) relate to removed posts that involve MRI and their many guises.

We look forward to bring you more from the investment property world, hopefully alot more positive than that of late.

To keep yourself informed, feel free to sign up using the feedburner widget on the main blog, or simply click the following link, confirm the mail and you will receive updates as we publish!

Subscribe to Investment Property Rumours by Email

Have a happy New Year!

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Using an 80 20 Mortgage to Avoid Mortgage Insurance


An 80 20 mortgage is also called a zero down loan or no money down loan. It is actually two loans, a regular home mortgage which constitutes 80% of the price of the home and a second mortgage or home equity loan that consists of 20% of the cost of the house. The idea behind this type of loan is avoiding mortgage insurance (PMI) by using the home equity loan as the down payment.

Just about all mortgages require some form of mortgage insurance if you are unable to make a down payment of at least 20 percent. By obtaining a second mortgage or home equity loan for 20 percent of the homes cost you can circumnavigate this requirement by using that second loan as the down payment.

There are variations of this type of mortgage such as an 80-15-5 loan. This means that the borrower got a main mortgage of 80 percent of a home’s purchase price, a piggyback loan for 15 percent, and made a 5-percent down payment. This can be a good option if you have some money for a down payment but not enough to cover the entire 20%.

The second mortgage can either be a fixed second mortgage or it can be a line of credit. If it is a fixed second mortgage then the interest rate is normally fixed for the entire length of the mortgage. Most fixed second mortgages are a 30 due in 15 which means that the second mortgage is amortized over 30 years, but is due in 15 years. The benefit of going with the line of credit as the second mortgage is that the interest rate is normally much lower than the fixed second mortgages rate. They can also be an interest only loan which could save you hundreds of dollars in mortgage payments every month.

The 80 percent first mortgage can be a fixed-rate (15-year or 30-year), adjustable-rate (usually 5/1, 7/1 or 10/1fixed period ARM) or interest-only loan. Typically, the interest rate on the second mortgage loan is higher than the interest rate of the first loan. But because the borrower doesn’t have to pay mortgage insurance, the overall cost is less than a traditional mortgage even with the higher mortgage interest rate on the second loan.

Plenty of mortgage programs allow borrowers to buy houses with little or no money down, but they usually require private mortgage insurance, or PMI. Getting an 80 20 mortgage can be a good way to avoid the extra cost that PMI will add to your monthly payments.

Canada Homes For Sale

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Type:————–Condo
Bedrooms:———3
Bathrooms:——–1
Sq Feet:———–1453
Built:————–1968
Parking:———–Stall
Basement:———No Basement
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