Real estate valuation is the cornerstone of investment decisions, whether the properties are intended for residential or commercial use. Although the primary objective of valuation is to determine fair market value, there are differences between commercial and residential properties.
In this article, we will learn more about residential and commercial properties, with an overview of the valuation methods for each type.
What is residential real estate?
Residential real estate is property intended for permanent or temporary accommodation and living. The primary purpose of owning this type of property is to provide a comfortable living environment for individuals or families. Residential property can be used for personal accommodation or as an investment asset through rental, but it is not usually seen as a primary source of income like commercial property.
There are many residential properties, such as apartments, villas, hotel apartments, and other residential properties, which vary according to individual preferences. However, there are several important factors during the evaluation, the most important of which are location, facilities, property condition, and other factors that affect the evaluation.
What is commercial real estate?
Commercial real estate is used for commercial or investment purposes to generate income or financial returns. This type of real estate is viewed as an income-producing asset, and its value is assessed based on the property’s ability to generate stable and sustainable cash flows. The most important types of commercial real estate include administrative offices, commercial shops, hotels, warehouses, and others.
What are the methods of real estate valuation?
Several methods are used to value all types of real estate, and the choice of method is determined based on the nature of the property and the purpose of the valuation. One or more methods may be used during the Real estate appraisal, including the following:
- Comparative method: This method is widely used in residential valuation, where the target property is compared to similar properties that have been sold recently in the same area. This method is based on the principle of ‘market value’, based on what actual buyers have paid.
- Cost approach: This is used when the property is new or unique in design, whereby the cost of rebuilding the property is calculated, minus depreciation or deterioration. This method is commonly used in the valuation of schools, hospitals, or buildings of a special nature.
- Income approach: This is the most important method in commercial real estate. The annual net operating income of the property is calculated, and then a capitalisation factor is used to calculate the final value. This method relies on financial analysis and performance indicators and requires a high level of expertise in reading financial and economic data.
Factors affecting the valuation of residential and commercial properties
Although the valuation process for both types of properties is based on similar analytical principles, the factors affecting the valuation differ in terms of priority and impact. The most important of these factors are detailed below:
– Usage:
In commercial real estate, use is one of the most important determinants of value, as the type of activity that can be carried out on the property and the demand for this activity in the local market directly affect the price of the property. A property used as an administrative office in a prime business area differs greatly in value from an industrial property in a remote area.
In residential real estate, use is related to residential comfort, number of rooms, interior space, and architectural layout, all of which influence the decision to buy or rent.
– Expected income:
Commercial property is primarily valued based on the income it can generate, whether from rent or direct operation, such as hotels or department stores. Future cash flows, occupancy rates, operating expenses, and return on investment are taken into account.
In residential real estate, although rental income is possible, it is not the primary factor in valuation. Appraisals rely more on market value, demand in the area, and supply conditions.
– Location
Location is a common factor for both types, but it is evaluated differently. In commercial real estate, location is viewed in terms of ease of access for customers, proximity to commercial centres and public facilities, and visibility on main streets.
In residential real estate, the ideal location is close to good schools, hospitals, and basic facilities such as shops and parks. Quality of life and safety are among the most important factors that increase the value of residential property.
– Condition of the real estate
In commercial real estate, the focus is on infrastructure, the suitability of the property for various activities, and ease of expansion or modification. The age of the building, the existence of licences, and the techniques used in construction all affect the valuation.
In residential real estate, the quality of finishes, maintenance, walls, floors, internal facilities such as electricity and plumbing, and everything related to daily living are considered.
– Economy
Commercial real estate is affected by economic changes. Rising interest rates, declining economic growth, and high unemployment rates can lead to a decline in demand for commercial leases and, consequently, a decline in market value.
Residential real estate, on the other hand, although also affected by economic conditions, is usually relatively stable due to its connection to the basic need for housing, making it less volatile.
In conclusion
we can say that the difference between residential and commercial real estate appraisal is not just a difference in numbers, but a difference in methodology, purpose, and influencing factors. Residential property focuses on living comfort and market value, while commercial property is viewed as an investment asset that must generate a steady income.
Therefore, hiring an accredited valuer with experience in the type of property in question is not a luxury but a necessity. Contact Aain for real estate valuation and have your property valued with the utmost professionalism.