Whether you're expanding your investment portfolio or acquiring your first commercial property, getting a clear picture of a property’s potential ROI should be one of your first steps.
Why?
Because knowing how much you stand to gain (or lose) helps guide your investment strategy, budget, and expectations. After all, when you invest in real estate—whether it’s an office building, retail or industrial space, or multifamily housing—success depends on how profitable your property will be.
But with a landscape full of variables like location, market trends, and property expenses, ascertaining a property’s profit potential can feel daunting. In this blog, we’ll go over how to evaluate the ROI of a commercial property before you buy so you can invest with confidence.
ROI, or return on investment, is the amount of money made on an investment after all costs and expenses have been deducted. Figuring out the potential ROI of a piece of property before you purchase it will help you determine if it will be a good investment for you or not.
There are a number of different ways to calculate the ROI of a property, including:
The cost and out-of-pocket methods are the most commonly used ways to calculate ROI, but all of these methods have their place.
There are a wide range of factors that can affect the ROI of commercial real estate, including:
Generally speaking, commercial properties have a higher ROI potential than residential ones because they tend to have higher rental rates, longer lease terms, and lower vacancy rates…which all translates into higher income.
Because there are so many factors involved in determining a property’s ROI, there are also a number of ways you can maximize the ROI of your commercial real estate.
For example, doing thorough research on a potential investment helps you know what you’re getting into, learn what tax incentives are available, develop a long-term investment strategy, and create a plan for making upgrades to the property. In addition, working with a professional to find and vet your investment property will help you achieve the best possible ROI.
The location of a property directly affects its demand and the rental rates you can charge tenants—and therefore its profit potential. A location that is experiencing rapid growth or has desirable amenities can often mean higher returns. For example, a commercial property located near major highways, public transportation, and thriving businesses are likely to have higher property values and generate higher rents.
Understanding current market conditions is crucial to determining an accurate ROI for a property. This research can give you insight into the demand for commercial spaces in the area, as well as vacancy rates and potential rental income.
Keep an eye on recent commercial property sales to get an idea of what kind of properties are most in demand, how much they are selling for, and where new up-and-coming hotspots may be. Additionally, watching economic trends like job rates and inflation can give you insight into the overall health of the market.
A well-maintained property will demand higher rental rates, attract higher quality tenants and more visitors, and can even boost sales. Assessing a property’s condition before you invest will help reveal potential repairs or maintenance issues and ensure your investment is sound.
It’s a good idea to hire a professional inspector to assess the property’s structural integrity, as well as its HVAC, plumbing, and electrical systems, and ensure it complies with all local regulations. You’ll also want to consider its curb appeal and potential for improvement.
Make sure to consider all expenses related to building ownership before purchasing, including taxes, insurance, maintenance, and utility bills. Certain property types, like hospitality, healthcare, or industrial buildings may have additional expenses as well.
Before you buy, put together a comprehensive budget that includes all potential expenses, and make sure to incorporate these costs into your ROI calculation.
Finally, calculate the cash flow you can expect to receive from owning the property. This is a crucial element in determining the profitability of your investment.
To calculate cash flow, simply add up all expenses (including any debt payments) and subtract them from the net income. If your potential cash flow is positive, that’s a sign the property could be a good investment. If it’s negative, you’re likely to lose money on the investment, so it’s probably a good idea to keep looking.
At CERRON Commercial Properties, we’re here to help you find your next great investment property with personalized guidance from brokerage to build-out.
When you work with us, you’ll not only have our own highly experienced team by your side, but you’ll also have access to our network of reliable appraisers, lenders, contractors, and property managers. From identifying the right property to planning future improvements that boost value, we’ll provide the end-to-end support you need to acquire or build your next successful investment. We’ll even help you determine if building or buying is the right choice for you!
If you’re ready to increase your commercial property investment portfolio, we’re ready to help you get there. Contact us today to get started.
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