What Is That Property Worth?

April 4, 2016

As investors consider adding to their commercial real estate portfolios, the decision often comes down to a very important question: “What kind of return can I expect?”

The answer isn’t always a simple one, with factors such as market diversity, saturation, location and overall economic conditions playing a role in the overall profitability of a commercial real estate asset. However, you can use some basic calculations to estimate what kind of income you should expect.

First, you’ll want to predict the property’s potential to generate rental income. Usually, an evaluation of similar properties within the surrounding area can provide insight into rental activity and what rates the market will support.  It’s also crucial to consider the fixed and variable expenses that might go into maintaining the property – a fair portion of rental income may need to be reinvested in the property, and that affects the bottom line.

You will also want to evaluate the future worth of commercial real estate properties. An asset that makes a tidy profit in rental income will hold its value well, but that isn’t the only figure to consider. If the market for a given asset is tight, there could be additional profits gained from a savvy resale. Adjustments to the project property value will also be made for differences in date of sale, age, condition, size, and/or local tax policies as they compare to other similar assets in the market.

After you’ve considered these factors, you can calculate your return on investment (ROI) with a standard equation. Simply divide what you expect to net by what you’ll have to spend to acquire and maintain the property (Income ÷ Costs = ROI.) If your projections are accurate, this calculation will help you determine whether this asset would be a good, solid investment.

Determining the projected value of a commercial real estate investment can be a useful part of determining  your profit potential, but it is important to remember that no investment exists without external factors. If you need help evaluating your current portfolio or future purchases to maximize earnings, contact the professionals at Intelica Commercial Real estate.