# Commercial Loans Blog

Today I am going to share with you an easy way to quickly estimate the value of a commercial property.  It's going to involve a tiny bit of math, but please don't freak out or tune out.  You remember how to divide, right?  Fourth grade math?  You can handle it.  And being able to quickly value commercial property is essential to both commercial brokerage and commercial mortgage banking.

In my prior blog articles about commercial financing, I described a Cap Rate as the return on your money that you would enjoy if you bought a commercial property for all cash.  In other words, what "interest rate" would you earn on your money if you bought an office building or strip center for all cash; i.e., you whipped out hundreds of thousands of dollars from your hidden stash under the floorboards, and you eschewed using any mortgage.  By the way, eschew is just a fancy verb that means to "deliberately avoid using or abstain from."

The formula to compute a Cap Rate is Net Operating Income / Purchase Price = Cap Rate.  If you do the caculation shown in the image above, you actually get 0.0711.  You have to multiply the answer by 100% to get a Cap Rate properly expressed as a percentage.

The following funny pic is a tiny bit naughty.  Read on at your own risk.  :-)

That's enough of a review of Cap Rates.  Remember, the object of todays' training article is to teach you how to quickly value commercial property.

Let's suppose that you are thinking about buying or financing a commercial property, and you want to know what the property is probably worth.   You ask the selling commercial broker for a marketing flier, which usually contains a Pro Forma Operating Statement and the property's net operating income (NOI).

You next make some calls to some local commercial brokers (commercial realtors), and you ask them, "I have a 25-year-old office building in the Kings Town district of Valencia.  What's your best guess at a reasonable cap rate?"  The commercial broker might come back and say, "Depending on the strength of the tenants and the length of the leases, you're probably looking at a cap rate of between 7.25% and 7.75%."  For a quick, desktop valuation, you decide to use a cap rate of 7.5%.

So you now know the property's net operating income (NOI) and the cap rate at which similar buildings are selling.  You can now roughly value the building.  The formula is shown below:

Let's use a NOI on the building we want to value of \$237,000 (remember, we got this off the marketng flier) and a 7.5% suitable cap rate (this is the cap rate that the local commercial brokers told us to use).  Plugging and chugging, we have:

\$237,000 / 7.5% = \$3,160,000

So this commercial building is worth around \$3.16 million.

Okay, let's do one more example.  The commercial mortgage borrower submits a commercial financing package that contains a Pro Forma Operating Statement.  You pluck off a NOI  of \$657,000.  Local commercial brokers suggest a cap rate of 6.75%.  Now we plug and chug:

\$657,000 / 6.75% = \$9,733,000

Remember, we started off today to learn a quick and easy way to value commercial buildings.  This was it.

A lof of commercial mortgage brokers starved during the Great Recession because banks were making very few commercial loans.  Today the commercial mortgage market is on fire because of seven years' worth of pent-up demand.  It's a very good time to get in the commercial mortgage brokerage business.

We are now including - at not extra charge - my Intermediate Commercial Mortgage Finance course when you buy for just \$549 my famous nine-hour course on commercial mortgage brokerage.

You'll need to know some commercial mortgage lenders.  If you know even one bank that is making commercial loans, you can parlay the contents of that business card into a free directory of 2,000 commercial lenders.

My hard money commercial mortgage company, Blackburne & Sons, was one of the few commercial hard money shops to survive the Great Recession.  You know how we did it?  Loan servicing fees!  I earn \$60,000 per month (not per year but rather per month) for collecting the payments on fewer than 250 commercial loans.  Imagine earning \$60,000 every month, even if you failed to close a single new loan.  The money in commercial mortgage banking is in loan servicing fees!

Show me any commercial mortgage company in the U.S., and I'll increase their bottom line by at least \$200,000 per year.

Topics: Cap Rates