Landing on great commercial real estate deals may be how you add significant growth to your portfolio. The value of commercial properties is much less volatile than that of other assets. Several states record substantial growth in the commercial real estate industry; they gain a better return on investment than other residential properties. Regardless, careful assessment of a real estate property before investing in it is always wise. The following metrics can be used to conduct the same.
The metric demonstrates how one can replace the initial capital that was spent on a commercial real estate property. Take an example of a property with a 60% rate translating to returning capital investment in 3 years. The cash-on-cash return is calculated by dividing the net operating income by the total amount used to invest.
Cash-on-cash Return = Net Operating Income
Essentially, the cash-on-cash return is calculated to measure the performance of various commercial investments. Most experts agree that an optimal range lies between 8-12%.
The CAP Rate assesses the return that the investor gets if they paid for the real estate commercial property outright. Upon purchase, the value must be measured by an appraiser. The assessment metric also helps to estimate the return that an investor will likely receive for a particular commercial property.
Capitalization Rate = Net Operating Income Sales Price
Net Operating Income
The NOI metric is the amount that a commercial property investor has after operating expenses are deducted from the revenue. It is determined by summing up all revenue sources, i.e., leases and rent, and subtracting the sum of all costs, i.e., taxes, utilities, and maintenance expenses. Mortgage, however, is not included in the costs. In real estate, a commercial property that has a high NOI is the ideal investment. One with a negative metric is more likely to be unsustainable for business.
Net Operating Income = Revenue – Operating Expenses
Real estate is an open field for business and has an extensive market. Understanding the value assessment of commercial properties will, therefore, help to differentiate the hot deals from the not-so-promising ones.