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Commercial Real Estate Investing For 2018 Winston Rowe And Associates
There are several fundamental indicators to take into consideration when evaluating the viability of commercial real estate investments.
By: Winston Rowe and Associates
These properties are commonly referred to as retail, office, industrial and apartment buildings, warehouses, and mixed-use buildings.
If you're wondering how to invest in commercial real estate, the following will explain the importance of conducting due diligence, including performing market research before investing, as well as the many benefits associated with commercial real estate investment.
Benefits of Commercial Real Estate Investing
Investing in commercial real estate can be very rewarding, both personally and financially. For many, the objective of investing in commercial real estate is for future wealth and security; others utilize it for tax benefits and increased diversity on investments.
A commercial re-developer can take advantage of the following benefits:
Higher Income: The hallmark benefit of investing in commercial real estate is higher potential income. Generally speaking, commercial properties typically have a better return on investment, which averages from six to 12 percent, while single-family home properties fetch between one and four percent.
Commercial real estate provides lower vacancy risk because properties are spread over several units. In addition, lease contracts are generally longer than those you will find with residential real estate.
Cash Flow: Commercial real estate has one very distinct advantage: a relatively consistent stream of income. What's more, commercial properties typically have much longer leases than residential rentals, which means steady and reliable income on a monthly basis.
Commercial properties generally consist of multiple units which means multiple streams of income. In some cases, tenants will also pay operating expenses on a commercial property. Known in the industry as triple net lease, this will generally include the lessee paying the building's real estate taxes, property insurance and maintenance costs, in addition to monthly rent.
Longer Leases: Perhaps the biggest perks of commercial real estate are the attractive leasing contracts. Commercial buildings generally have longer lease agreements with tenants than residential properties, which offers impressive returns and considerable monthly cash flow to investors. In many cases, lease agreements for commercial properties are signed for multiple years.
Commercial real estate investing offers investors an array of opportunities and advantages that other investment strategies don't. Once the benefits of commercial real estate investing are recognized, the next step is to consider the currently market conditions.
Choosing the Right Commercial Real Estate Investment
The question of 'how to invest in commercial real estate' only has one answer: with due diligence. Like any investment deal, it pays to do your homework and due diligence is a critical element to ensure success in real estate. Learning the ins and outs of commercial investing is important, but actively conducting market research is even more significant. In essence, the function of due diligence is to verify the commercial property is a viable investment option.
Real estate location is another important feature for investors to consider. If the location of the property is not in demand, more than likely finding tenants will be difficult and result in vacancies. Beginner investors should also examine the neighborhood a potential commercial property is located in. By going to open houses and talking to property owners in the neighborhood, investors can gain a better understanding of the property as a long-term investment.
Analyze comparables in the area, including researching future development. Otherwise known as "comps," these assets refer to prices paid for recently sold homes that are similar in location, size and style. Analyzing comps will help investors determine the current market value of a property. A general rule of thumb when determining comps is to choose a property where the square footage does not go beyond 10 percent higher or lower than that of the property being evaluated. This will allow for the most accurate comparables possible.
Understanding the common key metric used to assess real estate. Believe it or not, commercial real estate investing involves a wide array of math, as well as an understanding of real estate finance.
To be a player in commercial real estate, there are a few formulas you should know.
Net Operating Income
This is a calculation that equals all revenue and costs from a particular property. Configured before taxes, this number provides investors with an idea of how much they'll make from an investment minus all necessary operating expenses, which are required costs to run and maintain a commercial building. Costs typically consist of insurance, property management fees, utilities, repairs and janitorial fees, utilities and property tax.
Used to calculate the value of income producing properties, the "cap" — or capitalization rate — will provide investors with an estimate of future profits or cash flow. This is essentially the ratio of net operating income to property asset value.
Cash on Cash
Used to measure commercial real estate, cash on cash is a metric that provides investors with a rate of return on their real estate transaction. It's typically used by investors who rely on financing to purchase their property. Cash on cash will measure the return on the actual cash invested, which will provide an accurate analysis of an investment's performance.
Winston Rowe and Associates a commercial real estate due diligence and advisory firm. They can be contacted at http://www.winstonrowe.com