Evaluating Commercial Property: Ideal Models
When it comes to commercial property for sale, the ideal model of settling for one lies in having one property being evaluated against another.
Unlike the purchase of simple items, property is a bit complicated. With the amount of money one is set to spent, there is need to have a careful evaluation of all properties in the market to ensure you settle on the best. In whatever model you choose to use, the guiding principle is in the calculations you make. Mainly, these are calculations regarding the sustainability of any property up for sale in the market. If the calculations do not work, this is the number one sign that the investment should be avoided.
Different models for assessment have different features. However, there are certain features that are common in most models. First and foremost, there should be a provision for the size of the property and this is best expressed in terms of gross let-able area. If the property is for rent, there should be provisions for the rent that can be obtained. This is particularly important because it offers an indication of whether you can get another property within the same area. Moreover, it makes a provision of the net rental income that should be obtained. In short, it is a way of determining the properties’ value.
Different models, depending on the reports they produce, use different variables. These variables include the average interest rate over the past 20 years. With these years, trends are monitored and the results obtained are more reliable. There should also be an inclusion of the average inflation rate over the past 10 years or so. This inflation rate should be factored in the calculations.
Another variable that should also be factored in is the annual rental increase. This ensures that the future is predicted from a reliable platform, as the increases in rent always follow a certain trend. With this trend, future prices are determined for up to ten years. If letting a property, knowing the future prospects of such a property protects you from surprise increases in rent that you had not planned for!
In most models, assessment refers to the aggregated view of all activities done earlier into one model. This includes the Net Asset Value which is determined on an annual basis. This also factors in the gross rental income associated with the property, taking into consideration the variations that may come in. The expenses are also reflected here taking into account the monthly loan repayments on the average interest rates over the past 20 years.
The calculations of the gross rental income while deducting all relevant expenses results into the pre-tax cash flow. From this, the Return on Investment and the Internal Rate of Return can be determined.
A combination of all the attributes in a good model will be used in helping you make the right decision while choosing a property. However, besides using the model, there are many other factors that should be used in settling on a property. Know the kind of property you want and how ideal it will be for your activity. This way, you will narrow down on a few, consequently saving you a lot of time!
Harworth Estates are one of the largest landowners in the UK. They provide development land, industrial units, commercial property for sale.