Investing in real estate has attracted many as a way of earning passive income. It takes a lot of work and knowledge to be successful and grow your portfolio. One resource that is used by investors is the property valuation report.
Such reports are prepared by certified property valuers but there is a difference in their approach depending on whether the property is commercial or residential.
What is a residential property?
A residential property is one whose primary purpose is to serve as a home. It is reserved to be lived in. Aside from buying a home, this is most often the first purchase for an investor. Residential properties include:
- Houses
- Apartments
- Villas
- Terraces
- Subdivisions
- Duplexes
- Off-the-plan lots
What is a commercial property?
Commercial properties vary greatly as they are mainly used for business purposes. Examples of commercial properties include:
- Retail shopfronts
- High-rise office buildings
- Warehouses and factories
- Petrol stations
- Industrial parks
- Depots
How real estate investors use a valuation
Valuations are highly useful to real estate investors due to their comprehensive and objective nature. They are tailored to the property and to what the investor would want to know from the report. Of course, the primary use of a valuation report is to learn the market value and the many influences behind it. For investors, this information can be used to:
- Compare potential investments
- Learn the potential return on investment
- Insure your property
- Secure a loan
- Calculate rental yield
- Review rent or leasehold rate
It is also important to know that a property valuation report may be required by an authority for legal or tax purposes. Here, the valuations must be completed by a certified valuer who is both experienced and independent.
The valuation methods
What separates property valuation from such things as real estate appraisal is the report. Appraisals do not come with a formal report whereas a property valuation does. Another major difference is the methodology used to perform the valuation. This can differ according to the property type.
How to value residential properties
There are three main methods to conduct a standard residential property valuation. These are:
- The comparison approach
- The income approach
- The cost approach
There are several more methods that a residential valuer may use. What dictates the method to be used by a residential valuer is the planned purpose of the report. For most scenarios, the comparison approach is used as the primary valuation method.
How to value commercial property
As with residential properties, commercial property can be valued with a wide variety of valuation methods. The most commonly used method is a comparison which works the same as with valuing a home but with added considerations that apply to commercial properties only. Other than the methods mentioned above, commercial properties may be valued using:
- Residual land value
- Replacement cost
- Gross rent multiplier
- Hypothetical development method
Each serves a purpose and provides specific data to achieve its purpose. For example, the gross rent multiplier method is ideal for investors to assess the potential of various rental property options.
The differences in the valuation reports
There are a few key differences in the property valuation reports of commercial and residential property. These differences are:
Length: the length of a property valuation report and its detail depends on its method and purpose. In general, a commercial valuation report is larger than a residential report due to the added elements a valuer must consider.- Cost: Commercial valuations cost more than residential for the same reasons that they may be longer. It is a more complex process and requires the valuer to have the necessary expertise to execute it adequately.
- Timing: On average a residential property valuation can take 2-3 days to complete whereas a commercial property may take 3-5 days to be completed following an inspection. Timing may vary according to your choice of valuer and the purpose of the report.
Summary
Valuation reports are an excellent resource to allow investors to assess their current as well as potential future investments. If you are planning to order a report for either a commercial or residential property, it is important to understand the difference in reports to know what to expect.
In general, a commercial valuation report costs more than a residential report due to the added complexity of the report and the added weight behind its purpose.
If you want to know more about valuing either residential or commercial properties, call your local valuer service. Their specialists can best assist you with either valuation.