In the fast-moving world of Texas commercial real estate, understanding how properties are valued is key—whether you’re buying, selling, lending, or developing. At Propel Real Estate Capital, we specialize in small-balance and hard money commercial real estate lending, and we know that accurate valuation is the foundation of every sound investment decision.
Key Value Determination Methods:
- Market comparison approach
- Income approach
- Cost approach
- Development comparison method
One of the most common methods of determining value is the market comparison approach, often referred to as the sales comparison method. This is especially useful when a robust number of similar properties have recently sold in the area. For example, if a 5,000-square-foot retail strip in the Houston suburbs recently sold for $1.25 million, and a similar property a few blocks away is slightly newer but smaller at 4,500 square feet, the value might be adjusted to roughly $1.15 million to reflect the differences. Brokers and appraisers often narrow this down to price per square foot—in this case, $250/SF for the comp, which might set a reasonable range for the subject property. The more comps available, the more reliable this method becomes.
For income-producing properties, the income approach is often the gold standard. Let’s say you’re evaluating a 12-unit multifamily in Austin. Each unit rents for $1,350/month, giving a gross rental income of $194,400 annually. After deducting $48,600 in operating expenses (maintenance, property management, taxes, insurance), you’re left with a net operating income (NOI) of $145,800. If similar properties in the area are trading at a 6% capitalization rate, the estimated value is:
Value = NOI / Cap Rate
So that works out to be $145,800 / 0.06, thus we have a value of $2,430,000.
This method is particularly effective in established submarkets with strong rent data and low vacancy rates. For us as a lender, it’s also a way to evaluate debt service coverage and risk tolerance when structuring a deal.
When the property is unique or income and sales data are limited, the cost approach becomes more relevant. This involves calculating the cost to replace the structure with a similar one, then subtracting depreciation. For instance, a small industrial building in rural Texas might cost $100 per square foot to build new. If it’s 10,000 square feet, the replacement cost is $1 million. But if the building is 20 years old and shows $300,000 in depreciation, the adjusted value of improvements is $700,000. Add the land value—say $150,000—and the total estimated value is $850,000. This method is also commonly used for insurance purposes.
Valuing land for development requires a more nuanced approach, often relying on the development comparison method, or land residual approach. Imagine a developer is planning to build a small medical office plaza expected to generate $300,000 in annual NOI upon stabilization. If market cap rates for similar projects are at 7%, the stabilized value of the project is approximately $4.29 million. Subtracting estimated development costs of $3.5 million (including soft costs, construction, fees), the residual land value would be about $790,000. This approach helps identify what a developer can afford to pay for the land while still meeting return targets—and what a lender like Propel might consider as collateral value for a land loan.
What can we take away from the differing methods?
Of course, valuation in Texas doesn’t happen in a vacuum. Each market has its own pulse. In DFW, logistics properties near intermodal hubs may command premium pricing due to demand from national supply chains. In Austin, tech-sector growth continues to push office and multifamily values upward, particularly near transit-oriented developments. And in Houston, valuations can be influenced by the energy market cycle, meaning recent comps may not fully reflect future value stability.
Tax structure and local incentives also matter. Texas doesn’t have a state income tax, but property taxes can be high and vary by county. Zoning laws may differ dramatically even between neighboring cities, affecting what can be built—and therefore what land is worth.
At Propel Real Estate Capital, we routinely apply these valuation methods to underwrite loans across asset types and markets. Whether it’s a $500,000 bridge loan on a San Antonio retail property, a $2 million fix-and-hold in East Dallas, or a land loan on the outskirts of Austin, we tailor our analysis to the real-world dynamics of the deal.
Understanding these valuation approaches isn’t just for appraisers. For investors, developers, and lenders alike, knowing how value is derived means making better decisions, structuring smarter deals, and spotting opportunities before the competition.
In Texas real estate, numbers matter—but local knowledge is what turns numbers into insight. That’s where we come in.