You walk down the main street of your city and see a row of commercial buildings that all look alike. At first glance, you might assume they’re worth the same amount, but their valuations differ immensely. One is worth $1 million, another $5 million, and the third $10 million.
As a new investor, if you didn’t know their values, how could you possibly know if purchasing one of the buildings was a good deal?
Good deals require knowing a property’s worth, which is why our next step is to take a closer look at how you can determine value.
Below, I go into details of the variables you are looking for and ultimately trying to determine. Your ability to predict values will save you a ton of time as you look for your deal.
MEASURING A PROPERTY’S WORTH
A property’s current value drives much of the investment process, starting with how much you pay for it. The appraisal calculation takes into account multiple variables:
- The property’s physical condition: How old is the building? Is it damaged? Out of code? Worn or outdated?
- The building’s replacement value: What is the square footage? What materials were used in the building? How much would it cost to construct an equivalent structure?
- The property’s location: What neighborhood is it in? What’s next to it?
- The land: How much is the land itself worth? What are the dimensions of the lot?
- The property’s income potential: How much income has it generated in the past? How much is it expected to bring in next year?
- The building’s use: What is the building’s current use? (hotel, apartments, retail, or other)? Could it be repurposed in a way that increases the value?
With each of these data points, you get a more accurate, real-world estimate of a property’s worth, which allows you to predict the profit you’d earn from making the deal.
“All that matters in the end is the bottom line.” – Sam Zell
Don’t forget to snag a copy of my new book Catching Knives.
Packed with practical advice and personal anecdotes, this is your guidebook for embracing the next economic downturn and navigating the risk of distressed investing. With the right strategy, you can be one of the few who lean into hard times, make the most of them, and take advantage of once-in-a-generation opportunities.
LinkedIn: Jake Harris