Commercial Real Estate Investing For Dummies. Peter Harris

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      FIGURE 3-1: The Commercial Property Evaluator is a tool that helps you evaluate a property’s worth. It’s available on CommercialQuickStart.com.

Because cap rates are higher or lower depending where you are investing, and can change over time, you can adjust the cap rate you prefer to use in your market. Any good commercial broker can help you determine which cap rate to use for your market. After you decide on this, make sure to use the same cap rate to value every property in the same class. You can fill in the cap rates for your market in Table 3-1.

TABLE 3-1: Cap Rates

      The Commercial Property Evaluator will determine the leased up, stabilized value of the property for you using the following default settings, which is what we are currently using for most Class C apartment buildings:

If you’d like a look under the hood, Table 3-2 displays the formulas used by the Commercial Property Evaluator along with some actual numbers from the 50 unit “Courtside Apartments” so you can see how this works.

TABLE 3-2: Courtside Apartments Example

Using the online version our mentoring clients also enter the market rents to come up with a “Proforma” value so we know what the property will be worth when we increase the rents up to market value. To do this yourself with the Commercial Property Evaluator here in the book, take an extra step and enter the market rents instead of the actual rents. This will give you the proforma value of the property.

      We then compare these three values to give us an indication of what the upside looks like and whether it’s worth our time to pursue the deal:

      You can use the Commercial Property Evaluator to quickly separate deals into three piles so that you don’t waste your time on properties where the seller is simply asking way too much for the property. In most cases this is a pretty good clue that they aren’t motivated. They’re hoping that someone comes along who’s willing to pay more for the property than it’s actually worth.

Diving Deeper into Property Valuation

      The dictionary definition of the word analysis is “a separation of the whole into its component parts.” So, during this deep dive we break down any property analysis into its component parts:

      That’s it. We take a look at the income information. Then we take a look at the expenses. And finally, we add a loan or mortgage to the overall picture. We combine them to come to a conclusion as to whether this deal makes money. Analysis made simple.

      Any deal can be broken up into these parts. When you have these parts, you can calculate the net operating income, cash flow, cash-on-cash return, and cap rate. It’s easy-peasy once you've done it a few times!

      Not-so-obvious tips on analyzing

      When you’re analyzing any property, keep the following in mind: