Income Property Owners, How to Establish a Rental Rate

Commercial Property

Let's say your property is worth $1,000,000 and is a 10,000 SF building on a site without excess land.

Step 1, Apply an 8.0% return to the value if your hypothetical prospective tenant is creditworthy.

The resulting figure of $80,000 is the indicated annual NET Rent of $8.00 PSF.

Income Summary wiil be: $80,000 Projected Gross Income = $6,667 per Mo Rent

Less 10% vacancy & collection Loss = $72,000 Effective Gross Income (EGI)

Less: 2% Reserves for Replacement = $70,560 Projected Net Income (NOI)    

Next Step

Divide $70,560 / $1,000,000 = 7.06%, Round to 7%, this is your "Cap Rate"

This analysis assumes that ALL operating Expenses are "passed-thru" to the tenant including a management fee.

Cross Check, PSF Basis

$7.06 / $100 PSF of Bldg Value = a 7% Net Return on Value or "Cap Rate".

Market support, establish your own "ratio" by comparing asking rents to value from Listings using the above formula and apply this ratio.

Excess Land

If your property has excess land that can be sold separatey, you must exclude this value from your analysis.

Author

Daniel "Dan" Peele is a State-Certified General Real Estate Appraiser with over 35 years of full-time appraisal experience in central Florida.  Mr. Peele founded Central Florida Appraisal Consultants or "CFAC" in 1994.

CFAC website

FaceBook Link to Properties Appraised

Daniel Peele, ASA, RZ 887

Central Florida Appraisal Consultants (CFAC)

3956 Town Center Blvd

Orlando, FL  32837

407-230-1023

dan@danpeele.com

Member, American Society of Appraisers (ASA)

Member, Orlando Regional Realtor Association (ORRA)

Member, Financial Planning Association (FAP)

Subscriber, CoStar "Comps" the Premier Sales & Rental Data Provider

CoStar "Comps" Data Service

https://www.cfappraisal.com  (Central Florida Appraisal Consultants)





















Comments

Post a Comment

Popular posts from this blog

Insurance Appraisals

Image
Insurance Appraisal, What is it? An insurance appraisal documents the estimated cost to rebuild improvements to a property after a catastrophic event such as fire, storm or flood. Market value, land value and depreciation which are typically part of a mortgage-based appraisal are not considered. The Replacement Cost New (RCN)  estimate of a properties improvements can be obtained in (3) ways: 1) Your Insurer pays an expert to estimate RCN 2) Your Insurer uses "in house" cost estimating software 3) Property owner pays an expert to estimate RCN Pros & Cons of each method 1) Good IF you get a say in who the contracted "expert" is 2) Good IF Insurer spends adequate time in the RCN estimate 3) Best     IF  you are looking for "peace-of-mind" by knowing that you are not under-or-over insured.  Your insurer will likely prefer this method since they are not liable for you being underinsured under this scenario.  Your Expert Daniel Peele, RZ 887 is a State...
Read more
Image
  Reserve Study, Condo & Homeowners A Reserve Study is a financial planning tool that takes into account future projected  capital expenses such as roof replacement, paint, paving & sealing etc. Excel spreadsheets are used to display the input parameters such as replacement cost per item, the estimated useful life the remaning useful life. The 2nd half of the analysis shows the reader how much money must be put aside in a reserve fund to pay for these future expenses.  The infomation is diplayed in both dollar sums per year and by graphs that show the "percent funded" at various points in time based on beginning account balances & amount put aside per year. There are different types of Reserve Studies, some are called "SIRS" or Structural Integrity Reserve Study, the other type is a "Traditional Reserve Study".  Only certain buildings with age and height requirements are required to have a SIRS completed by December 2024. Reserve Studies have t...
Read more

Master Policy Insurance Appraisal

Image
Serenata, a 398 unit condominium in MetroWest, Orlando FL In June 2024, CFAC provided an Insurance Appraisal for the Condominium Master Insurance Policy. CFAC offers competitive low prices along with the best quality work product in the business. Daniel Peele, RZ887, State Certified General Estate Appraiser is a Business Member of CAI, the Community Associations Institute in Orlando.
Read more