Comparative Market Analysis Tip for Real Estate Investment Property

click to enlargeA Comparative Market Analysis (or CMA) is a commonly-used real estate report regularly created by real estate professionals for the purpose of establishing the market value of property based upon the sales activity of comparable properties in the general area.

If you ever listed a house for sale with a real estate broker, chances are good that the listing price of your house was based upon based a comparative market analysis.

The idea is straightforward. The CMA helped the broker determine a fair market price for your house based upon the recent sale prices of similar residential properties in and around your neighboring area.

Fair enough.

Unfortunately, however, sales of comparable properties don’t tell you as much about real estate investment property sales as they do about single-family residences.

There is generally an adequate supply of house sales of similar size to draw data from and make comparisons. Real estate investment property typically suffers from the lack of enough comparable property to be meaningful. For instance, how many strip malls would you expect to find that recently sold that exactly match the square footage of a strip mall you’re trying to set a value for in the same market area?

To overcome this shortcoming, your comparative market analysis for these types of investment properties then must consist of some additional factors to make your research a bit more productive.

In this article, I want to show you two factors you can add to your CMA when working with real estate investment property.

1. Price per Square Foot

You can examine the selling prices per square foot to see if you can discern a trend. This way at least you are given the option to consider the sale of any commercial real estate based upon price per square foot and compare them to your property regardless of overall size.

2. Gross Rent Multiplier

Another consideration is to look at each property’s annual gross rent by using what is called the gross rent multiplier. The computation is simple: You just divide the property’s selling price by its annual gross rent.

For example, if an apartment building with gross rents of $80,000 sold for $480,000 the gross rent multiplier would be 6.0. So if the rental property you’re interested in has an income of say $100,000 you could figure a ball park fair market value of $600,000 (gross income x gross rent multiplier).

You can find sale prices and property dimensions in the public records from the tax assessor and city clerk. There are also a growing number of Internet sites that collect information about commercial properties sold and for sale. And of course, brokers actively engaged with investment property always accumulate this type of data and should be willing to give you this information if you ask.

Rule of Thumb

A comparative market analysis by itself is seldom going to tell you enough to make an investment decision about buying or selling. A CMA is useful insofar as it provides a “feel” of the market, and you are certainly encouraged to create one for your individual real estate analysis.

Bear in mind, though, that a comparative market analysis is just one small step leading up to the more important evaluation of the real estate investment property’s income stream.

So You Know

ProAPOD provides two real estate investing software solutions that enable you to quickly create a CMA.


James Kobzeff

James Kobzeff has over thirty years experience as a realtor and investment real estate specialist. He is the developer of ProAPOD real estate investment software and freely shares his real estate investing articles.