There is much more to the value of commercial real estate properties than the asking price, or even the selling price. In order to wisely determine whether a potential investment is a good one for a buyer, it is important to understand how smart investors calculate the actual value of a property.

First it is helpful to grasp the four elements of value, which apply to commercial property as well as any other commodity that can be bought or sold: Demand, scarcity, utility and transferability. Look at the properties under consideration with respect to each of these elements. This approach can help identify any qualitative differences between them.

Investors use the income method to determine the value of commercial real estate. This method is best suited to properties that generate income from tenants, and it can help provide a more accurate valuation than merely looking at comparatively similar properties. With the income method, investors use the annual net operating income of the property and their desired rate of return on investment to estimate the value of that property for their purposes.

Net operating income refers to the income that the property is expected to generate over the course of the year, less the expenses required to keep up the property and ensure it is fully occupied by tenants. These operating expenses typically include the costs of maintenance and repairs, building renovations and advertising for new tenants. Property management fees may also be included, since investors do not necessarily want to take on the day-to-day management responsibilities of the properties they hold.

Desired rate of return on investment, or capitalization rate, refers to how much an investor expects to earn from commercial real estate over the course of a year, calculated as a percentage. A 10% rate of return on an investment of $1 million would be $100,000. Divide the net operating income of the property by the capitalization rate to arrive at an estimated value of the property, based on the investor’s priorities. If this value is greater than the asking price, the property could be a smart investment to pursue. If it is less than the asking price, the property could be overvalued, or the investor could be expecting a rate of return that the property cannot support.

Smart investors look beyond the asking price of a property to do some advance calculations on how much value it will offer to them as a commercial real estate investment. While value is measured both qualitatively and quantitatively, it is helpful to have a grasp of both in order to obtain the most complete and accurate valuation possible.