COMMERCIAL REAL ESTATE INVESTING Part #1
by: Ernie Cabrera from REA Commercial
How do you find out how much you will get as a return on your real estate investment?
How do you know what a property should be valued at?
How much income will an investment produce?
I am asked these question all the time from new investorswho are just getting into the commercial real estate business. I think it is good to know some of the basic calculations that will help you evaluate investments. There is much more to a properties value and it is more complicated to compare investments, but here are the basics.
Capitilization Rate - It is used to evaluate what a property's income and to compare values.
Cap Rate = Net Operating Income (NOI) / Sales Price (Value)
The capitalization rate (cap rate) is defined as being a measurement of the ratio between the cash flow produced by an asset (NOI) and its capital cost (purchase price) or its current market value.
So in simple terms it is the income produced by an investment (NOI) divided by the current or future value of that said property gives you the cap rate.
If you have two out of the three values in this formula, you can get the other value:
Sales Price (Value) = Net Operating Income (NOI) / Cap Rate
Net Operating Income (NOI) = Cap Rate / Sales price (Value)
I hope this helps explains some basic questions on what is your return on your real estate investments. Please stay tuned for additional parts to this series.
COMMERCIAL REAL ESTATE INVESTING PART #2 (coming soon)
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