I am negotiating for a commercial property (one (1500 sqft space) with a 2 Br apartment on the second floor. I have been using Cap Rate to evaluate the deal but just read in an old post that maybe I should be using comps. Using comps will be very difficult. How should I be evaluating this deal?
Since this is a mixed use property, residential over commercial you probable need to evaluate the rental separately from the commercial. This means you will need to research similar residential units of the same size and amenities which could give you comparable market value for similar unit and allow you to calculate a gross rents multiplier for the residential and compare it to the prorate income from other similar area units?
Then consider the income approach for the commercial space! What is the area’s vacancy factor vs. this properties lease rolls? What is common expenses for the area? How and who do you lease this to? Is this a flat rental market or triple net market? What condition is the property in? Is it up to fire / life / safety codes? If repairs are needed, how much?
Put it all together it should give you a financial picture of your potential income, expense and value!
Jonny - commercial property is primarily driven by its Net Operating Income and the prevailing cap rate of similar properties in that area. To find out the cap rate, contact commercial real estate brokers familiar with the area; cold-call a commercial appraiser. Get on Loopnet.com (free) and search for properties for sale in that area, then call the listing broker. Ask him about cap rates in the area.
Having said that, I do consider the average cost per unit of similar properties sold. You can also access these via loopnet. The free version will give you a range, if you want exact numbers, you have to pay. But when you’re starting to get serious about a particular property, paying the $45 per month may be worth it.
Hope that helps.