Commercial property investments are a great way to grow your wealth and security, provide tax benefits and increase the diversity of your investments. However, before you sign that check make sure you do your homework. Performing thorough market research will help you discover if the property is right for you. With this knowledge and an accurate appraisal from Paramount Property Analysts, you’ll have the confidence to move on your new investment.
Benefits of Commercial Property Investments
Commercial property investments produce three major benefits in comparison to residential property investments: higher income, steady cash flow and longer leases. The return on investment, or ROI, averages around 6-12% for commercial properties, versus the typical 1-4% return seen on residential properties.
One reason for this higher ROI is the lower vacancy risk when a commercial property has multiple units. Additionally, commercial property tenants usually sign longer lease contracts, which offer impressive returns and sizeable monthly cash flow. Most residential leases are only one year long, however, in many cases commercial lease agreements cover multiple years!
In many instances, tenants pay the majority of a property’s operating expenses. This is known as a triple net lease, where the lessee pays the real estate taxes, property insurance and maintenance costs along with their monthly rent. These factors provide both a lower carrying cost and a relatively consistent stream of income, making your overall cash flow steadier with commercial investing.
Tips for Investing
Before starting your journey in commercial property investments, it is important to conduct thorough market research. Retrieve as much information as possible on the property’s location, as well looking at as comparable properties.
Examine the Location
Examining the surrounding neighborhood is important before investing in a commercial property. Simply driving around and talking to other property owners in the area will often shed light on both the specific property and the general location. If the location lacks demand, it may become a challenge to find tenants and fill vacancies.
Check Comparable Properties
Comparing the sales amount of similar properties and future developments also helps determine the current market value of the property. When choosing a comparable property a general rule of thumb exists. Choose a property with a square footage 10 percent higher or lower than your desired property. Implementing this rule will allow you to receive a more accurate comparison.
Understanding Common Key Metrics
When investigating commercial property investment opportunities, make sure you understand the common key metrics used in commercial investments. Doing so will help you evaluate what type of property is right for you.
Evaluating a commercial property to invest in involves three common metrics: net operating income, capitalization rate and cash on cash return.
Net Operating Income
The combined value of all revenues and costs from the property is the net operating income. This number provides investors an idea of how much they stand to make earn from the investment before taxes by taking into account all necessary operating expenses. Operating expenses typically include insurance, property management fees, utilities, repairs, janitorial fees and property taxes.
Capitalization rate is calculated through the ratio of net operating income to property asset value on income-producing properties. This metric provides investors with a good idea of how much they will make from future profits or cash flow.
Cash on Cash
Cash on cash provides investors with a rate of return on their real estate transaction. This metric is typically used for investors that are relying on financing to purchase their property. Cash on cash measures the return on the actual cash invested, providing an accurate analysis of an investment’s predicted performance.
Contact Paramount Property Analysts for an Accurate Appraisal!
Before you make a big purchase and write that check, make sure you are paying a fair price for the property. At Paramount Property Analysts, our appraisers are experienced, fair, and committed to providing an accurate evaluation. Give one of our six locations a call today, we serve all of Texas!