What Determines The Actual Value of an Investment Property?


 What determines the actual value of an investment property?

There is a multitude of value drivers that contribute to the value of commercial real estate.

The adage of location, location, location, sure isn't wrong.

But sometimes, investment real estate has different drivers of value.

In my opinion, there are three main drivers of value to any investment real estate asset. It can be an apartment building, a single-tenant net-leased building, or a multi-tenant leased building.

 

1.) Condition and age of the roof. Even in many net leases, the owner is responsible for the roof of the property. This can be a significant expenditure if your roof life has less than five years left when you purchase the property. A new roof is golden, an older roof (20 years or more) bears a fine toothcomb inspection and then you negotiate accordingly.

2.) Condition of the parking lot. This is another high-ticket item that sometimes, even in net leased properties, is the owner's responsibility. As with roofs, it is not hard to determine if the asphalt or cement on the parking lot has reached close to the end of its useful life or has a lot of life left. Ask me how I know this… I learned this the hard way when I personally bought a net-leased property that had parking lot issues. I did not practice what I preach or do enough due diligence. When I started getting quotes for the repair and/or replacement of the parking lot, it was more than one year's lease value. I was able to sell that property without taking a considerable haircut but learned a hard lesson that the parking lots are a huge driver of value.

3.) Strength and term of the existing lease. If the tenant only has one year left on the lease and has no intention of renewing the lease, there goes your value. Conversely, if the tenant has been renewing the renewals of the lease early and there is a renewal or two left on the lease, you're probably golden. Also, the strength of the tenant… is it a mom-and-pop operation that has been struggling to make the rent or a national credit tenant that cranks out the rent every month with no questions asked.

 

 There are other drivers of value with an investment property, but these are the three essentials.

If you would like to visit about commercial real estate or just life in general give me a call at 765-427-5052… I would love to have a chat with you.


Respectfully Submitted

Brad Neihouser

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