One of the first questions you’ll ask yourself when you are looking at a new property to purchase is: What is this property worth? That is a different question then: How much can I pay? And it’s still different then: What can I get this property for? But all of those questions need answers before you put in an offer to purchase a new property.

How an investor chooses to value a property can depend on the size of the property or the sophistication of the purchaser. We rely on the simple methods, both because we are new to commercial investing, and because we’re looking at small properties. But, simple doesn’t mean less reliable or less accurate when it comes to commercial valuation.

Essentially, there are three ways to value a commercial property:

1. Direct Comparison Approach

2. Cost Approach

3. Income Approach (which includes the DCF method and the Capitalization Method).

The direct comparison approach uses the recent sale details of similar properties (similar in size, location and if possible, tenants) as comparables. This method is quite common, and is often used in combination with the Income Approach.

The cost approach, also called the replacement cost approach, is not as common. And it’s just what it sounds like, determining a value for what it would cost to replace the property.

The third, and most common way of valuing commercial real estate is using the income approach. There are two commonly used income approaches to value a property. The simpler way is the capitalization rate method. Capitalization Rate, more commonly called the “Cap Rate”, is a ratio, usually expressed in a percent, that is calculated by dividing the Net Operating Income into the Price of the Property. The cap rate method of valuing a property is where you determine what is a reasonable cap rate for the subject property (by looking at other property sales), then dividing that rate into the NOI for the property (NOI is The Net Operating Income. It’s equal to income minus vacancy minus operating expenses). Or, you could figure out the asking cap rate of the property by dividing the NOI by the asking price.

For example, if a property has leases in place that will bring in, after expenses (but not including financing) an NOI of $10,000 in the next year and comparable properties sell for cap rates of 6% then you can expect your property to be worth approximately $166,666 ($10,000/.06 = $166,666). Or, said another way, if the asking price of a property is $169,000, and it’s NOI is estimated at $10,000 for the next year, the asking cap rate is approximately 6%.

Where this gets tricky is when properties are vacant, or where the leases are set to expire in the upcoming year. This is often when you are forced to make some assumptions. (We’ll save how you deal with this for another day.)

The other income method is the DCF method, or the Discounted Cash Flow method. The DCF method is often used in valuing large properties like downtown office buildings or property portfolios. It’s not simple, and it’s a bit subjective. Multiple year cash flow projections, assumptions about lease rates and property improvements and expense projections are used to calculate what the property is worth today. Basically, you figure out all of the cash that will be paid out and all of the cash that will be brought in on a monthly basis over a specific period of time (usually the time you plan to hold the building for). Then you determine what those future cashflows are worth today. There are computer programs like Argus Software that help in these types of valuations because there are many variables and many calculations involved.

For the small investors, like us, using a combination of comparable property sales and income valuation using cap rates, will provide a reliable valuation. The real issue is convincing the seller that they should sell based on today’s income and today’s comparable properties. In the case of a mixed use commercial building we just tried to buy, the seller was pricing their property based on assumptions that leases will renew in the next 6 months at substantially higher rates and that the area of the property will continue to improve making the property more desirable. Unfortunately, we don’t buy properties hoping for appreciation. We buy properties today because the property will put more money in our pocket each month then it takes out, and the property fits within our investing goals.

Analysts are bracing themselves for a stream of highly negative news in the Commercial loans department very soon. Failing businesses who have pre-existing loans agreements and are not meeting their rent payments are causing development companies and other banks a lot of drama.

The Federal Reserve and other officials have done their best to try and cool down the problems but as the economy tumbles so to to peoples job and incomes. This is only going to make the situation worse. Like a domino effect almost all industry sectors will be affected, both commercial and industrial.

Some of the lenders are totaling up their losses but these have not been reported in the mainstream media just yet. As residential foreclosures mount up what no one realizes is that at the same time businesses have been suffering just as bad and there was a big surge in commercial property carrying organized mortgages that were sold as bonds on wall st many years ago. Before the market crashed at the end of 2008 there was allegedly $700 billion dollars in these mortgage securities and now some of them have lost as much as 40% of their value.

Officials are still tallying up all the numbers and analysts say that when these figures come out in the media it won’t be pretty. It could even be the next catalyst for a downturn / sell off on the equities market again.

Those with bigger loans in the commercial industry realize that if the economy takes anther bigger hit at the end of this year (as feared), they are at a bigger risk of not only losing their business but their livelihoods as well. Time will tell.

In commercial real estate, the leasing process is the foundation of the cash flow for investors. On that basis if you as a real estate agent lease more property successfully then you can achieve more sales over the longer term. The landlords will come to you at sale time because you helped them at lease time.

On this basis, the best sales people in commercial real estate are also very good leasing people. They know how to negotiate and structure a lease that can help the property owners sell the property at a future time.

If you want more commissions overall in your career in commercial real estate then the focus should be for you to lease and sell. Become an expert in both.

Many leases when they are negotiated carefully and correctly will set the property up for future sale. That will be through well negotiated factors such as:

Rental types Rental growth and rent reviews Option terms Minimisation of vacancy threat Optimised tenancy mix Leases that relate to the landlords plans and property Leases that underpin and strengthen the landlords position and investment Leases that protect the property improvements and performance

So to lease more property than your competitor real estate agents you have to follow a plan that works for you given the demographics of the area and demands of the local business community.

To lease more property than other agents, the following 10 point strategy and plan will help you.

Know who all the major business leaders are in the area. Talk to them on a regular 60 to 90 day basis about their property needs. You must establish personal rapport with these people if you are to be successful in leasing commercial property. Understand supply and demand of new lettable space to come onto and that exists in the local market. Watch the local precinct plans for zoning changes and development regulations that can impact the area. Understand access and transport corridors for the local businesses. Look for any threats and changes. Understand the supply of raw materials for the local businesses. Look for any threats and changes. Get involved with finding new development land or redevelopment opportunity for local property developers. These new sites can be a source of major project leasing over a lengthy period of time. Understand the rental types and rates that the recent lease deals are showing. Rent can be gross or net, and the choice will impact the recovery of outgoings for the landlords you serve. Monitor the lease incentives in both type and amount so that clear market alternatives are available to landlords when the next lease deal arises. Create a database of leads and information from all the people that you talk to. If done well this will be the main source of future business for you. Monitor all the local businesses and their leases for expiry and option dates. This will be high value data to market new vacancies into.

Commercial property leasing is a significant source of new business for real estate agents. If done correctly your leasing services will underpin just about all other parts of your sales and property management services.