Commercial Property Value Calculator
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Determine the maximum fair price for commercial property based on the 3 Rule Money method.
Results
Maximum Fair Price
£0
3x Annual Rent
Implied Gross Return
0%
On initial investment
Estimated Net Return
15-18%
After expenses (typical range)
When you’re buying or selling commercial property, you don’t need a finance degree to know if a deal makes sense. One of the oldest, simplest rules still used by brokers and investors across London and beyond is the 3 rule money. It’s not a law. It’s not a government guideline. But if you ignore it, you’re likely overpaying-or selling too cheap.
What Exactly Is the 3 Rule Money?
The 3 rule money says this: the purchase price of a commercial property should be no more than three times its annual gross rental income.
That’s it. No complicated formulas. No spreadsheets with 20 assumptions. Just take the total rent the property brings in each year, multiply it by three, and that’s your maximum fair price.
Let’s say a retail unit in Croydon generates £60,000 in rent per year. Multiply that by three: £180,000. If the seller wants £220,000, you walk away. If they’re asking £160,000? That’s a strong offer.
This rule works because it ties value directly to cash flow. Unlike residential homes, commercial properties aren’t bought for lifestyle-they’re bought to make money. Rent is the only real measure of success.
Why Does This Rule Exist?
The 3 rule money isn’t magic. It’s rooted in basic risk and return math.
Think about it: if you pay three times the annual rent, you’re effectively getting a 33% return on your investment in year one (100% ÷ 3 = 33%). That’s high. But here’s the catch: this return doesn’t account for expenses.
Commercial property isn’t free to run. You’ve got maintenance, insurance, property taxes, management fees, and periods when the space sits empty. The 3 rule money assumes those costs will eat up about half your gross rent. So your actual net return ends up around 15-18%-which is solid for a low-effort, long-term asset.
Compare that to the stock market. The average annual return over the last 20 years is about 7-8%. A commercial property hitting 15% net return? That’s why investors keep coming back to this rule.
When the 3 Rule Money Breaks Down
Like any rule of thumb, the 3 rule money isn’t perfect. There are times when it doesn’t apply-or even misleads you.
Prime locations often break the rule. A corner unit on Oxford Street in London might rent for £150,000 a year but sell for £700,000. That’s nearly five times rent. Why? Because the tenant is a global brand like Apple or Zara. The property isn’t just a space-it’s a symbol of prestige. Buyers pay for scarcity, visibility, and long-term tenant stability.
Properties with below-market rent also defy the rule. Imagine a warehouse in Birmingham rented at £40,000/year… but the lease is up in six months. The current rent doesn’t reflect what the market will pay once it’s re-let. In cases like this, you’d look at the reversionary value-what rent you could get after the current tenant leaves.
Special-use buildings like pharmacies, labs, or petrol stations are another exception. These are hard to re-let if the tenant leaves. So even if they bring in £80,000/year, buyers might only pay two times rent-or even less-because the pool of potential buyers is tiny.
How to Use the Rule in Real Deals
Here’s how to apply the 3 rule money step by step:
- Find the property’s annual gross rent. Check the lease agreement. Don’t guess. If it’s multi-tenant, add up all rents.
- Multiply that number by three. That’s your price cap.
- Compare the asking price to your cap. If it’s higher, dig deeper. Why? Is the rent about to rise? Is the tenant creditworthy? Is the building in a growing area?
- If the price is below the cap, ask: is the rent sustainable? Is the building in good condition? Are there hidden costs?
- Use the rule as a filter-not a final decision.
For example, a 2019 study by the Royal Institution of Chartered Surveyors (RICS) found that 72% of commercial property deals in the UK that met the 3 rule money generated a net yield above 12% over five years. Those that didn’t? Only 31% did.
What to Look for Beyond the Rule
The 3 rule money tells you if the price is reasonable. But it doesn’t tell you if the property is a good investment.
You still need to check:
- Tenant quality: Is the renter a national chain with strong finances? Or a small business with shaky cash flow?
- Lease length: A 10-year lease with a 5% annual rent increase is better than a 3-year lease with no increases.
- Location trends: Is the area improving? Are new transport links planned? Is footfall rising?
- Building condition: A £1 million property with a leaking roof and outdated HVAC isn’t worth the price, even if rent is high.
- Service charges: Some commercial leases pass on building maintenance costs to tenants. Others don’t. Know which you’re taking on.
One investor in Manchester bought a small office block for £1.1 million-1.8 times rent-because the tenant was a government agency with a 15-year lease. The rent was low, but the risk was near zero. That’s the kind of deal the 3 rule money helps you spot.
How It Compares to Other Rules
There are other rules used in commercial real estate:
| Rule | Formula | Best For | Limitations |
|---|---|---|---|
| 3 Rule Money | Price ≤ 3 × Annual Gross Rent | Quick screening, small to mid-sized units | Doesn’t account for future rent growth or expenses |
| Cap Rate | Net Operating Income ÷ Price | Accurate pricing, institutional buyers | Requires accurate expense data; hard for beginners |
| 1% Rule | Monthly Rent ≥ 1% of Purchase Price | Residential rentals | Too loose for commercial; rarely applies |
| Yield on Cost | Net Rent ÷ Total Development Cost | Developers building from scratch | Useless for existing properties |
The 3 rule money is the fastest. The cap rate is the most accurate. Most experienced investors use both: they screen with the 3 rule, then verify with cap rate.
Common Mistakes People Make
Even smart people trip up with this rule.
- Using net rent instead of gross. Gross rent is what the tenant pays before any deductions. Net rent is what the landlord actually gets after fees. The rule uses gross.
- Forgetting vacant periods. If a property has been empty for two months, you can’t assume it’ll be fully occupied next year. Adjust your rent estimate.
- Assuming rent will rise. Just because inflation is high doesn’t mean your tenant will agree to a rent hike. Check the lease terms.
- Ignoring location risk. A property in a declining town might look cheap-but if no one wants to rent it, the rule won’t save you.
I once saw a buyer offer £900,000 for a warehouse in Sheffield with £300,000 annual rent. On paper, that’s 3 times rent. But the building had no loading bays, no parking, and sat next to a closed factory. It took 18 months to rent it out-and at half the expected rent. The rule didn’t fail. The buyer ignored the context.
Final Thoughts: Is the 3 Rule Money Still Relevant in 2025?
Yes. More than ever.
With interest rates still above 4% and inflation lingering, investors are more cautious. They want certainty. The 3 rule money gives you a clear, objective benchmark. It stops you from getting caught up in hype or emotional bidding wars.
It’s not the whole story. But it’s the first story you need to read.
If you’re buying commercial property, run the numbers before you make an offer. If the price is over three times the rent, ask why. If it’s under, ask why no one else has snapped it up.
That’s how you find the real deals.
Is the 3 rule money used in the UK for commercial property?
Yes. The 3 rule money is widely used by commercial brokers, small investors, and property managers across the UK. While institutional buyers rely on more complex models like cap rates, the 3 rule remains the go-to screening tool for quick decisions, especially for units under £2 million. It’s taught in RICS courses and referenced in property investment guides published by UK real estate firms.
Does the 3 rule money apply to retail, office, and industrial properties?
It applies to all three, but with different expectations. Retail units often trade at 4-5 times rent in prime locations. Industrial warehouses typically stay closer to 2.5-3 times. Office spaces vary by city-London offices may hit 4 times, while regional offices stick to 2.8-3.2. The rule works as a baseline, but you must adjust for property type and location.
What if the property has multiple tenants?
Add up all the annual rents from every tenant. For example, if a building has three units renting for £25,000, £30,000, and £35,000, the total gross rent is £90,000. Multiply by three: £270,000 is your price cap. Make sure the leases are active and the tenants are creditworthy. A single vacancy can drop your income significantly.
Can I use the 3 rule money to sell my property?
Absolutely. If you’re selling, use the rule to set a realistic asking price. If your property generates £120,000 in rent, a fair price range is £300,000-£360,000. Pricing higher than three times rent without strong justification (like a long-term tenant or planned development) will scare off serious buyers. The rule helps you avoid overpricing.
Is the 3 rule money the same as the cap rate?
No. The 3 rule money is based on gross rent. The cap rate uses net operating income (gross rent minus all operating expenses). A property with a 3 times rent price typically has a cap rate of 15-18%. The 3 rule is a shortcut. The cap rate is the full picture. Use both together for the best results.
If you’re serious about commercial property, memorise this rule. Test every deal against it. Let it be your first filter. It won’t tell you everything-but it’ll keep you from making the biggest mistake: paying too much.
