Most of you know that my background in real estate started on the architecture side. Recently I have come across some clients that asked me to value their commercial property in downtown Idaho Falls and I have to say its a whole different ball game. Because, its an investment and in this case its not a fully realized investment, meaning its not completely leased out.
Side Note- thats actually how I met them, they are looking to develop the second floor of this building into loft apartments and I happen to know a good architect.
By running the comps I was able to hone in on a price that seems pretty reasonable based off of other similar properties nearby. However, there are a few components to commercial that are different. The one I want to talk about today is capitalization rates or cap rates.
Let’s say you are looking to invest $100,000 into something and you are trying to decide where to put it. Obviously you want to get the largest return on your money and that is where cap rate comes into play. However, after having done a tremendous amount of reading I’ve determined that cap rates must be taken with a grain of salt. The formula is basically “Cap Rate = Net Operating Income / Price”. The net operating income can be hard to find or evasive because good record keeping hasn’t been done, or management costs are artificially low because the owner does them etc. Not to say that the cap rate isn’t a good indicator but people should be wise when they see it to still take the time to develop a pro forma that will tell them if they will really be making money off of it at the end of the day.
(Not this building…its still a secret, although rumor has it that it is also going to be undergoing some changes in the next year)