We started our Smart Investor Series on investing in commercial and industrial property with an article on multifamily properties. Investors thinking of entering the hot multifamily commercial real estate investing market need to know the basics of evaluating the deal.
In this article: we’re presenting an overview of several types of investments in commercial and industrial property, but with a focus on evaluating the financial fundamentals of the deal.
Our focus on financial fundamentals is on income-producing property investments. This is not to suggest that investments like vacation properties, lots, and vacant structures cannot be good investments, only that their growth must come through appreciation.
Using Cap Rate As A Measure
There are many ways to evaluate a potential investment in an income-producing property; and, depending on the type of property, some can be quite complex. But a good ‘first blush’ can be the cap rate according to Rick Bean in Demystifying multifamily cap rates, NOI, and investing basics. Easily derived by dividing the NOI (Net Operating Income, income after all expenses except taxes and interest on the debt) by the offering price, cap rate can certainly give you an idea of how viable the investment may be.
For example, let’s assume the property is being offered for $500,000. A typical range of cap rates for investment properties might be from about 5% to 10% or more.
At the low end, the cap rate indicates that the property has been priced as a relatively safe investment. This can be the case where long-term leases with nationally prominent firms are in place.
On the other hand, a high cap rate can mean that the property experiences higher than normal vacancy levels, has a poor location, or is in need of maintenance or other upgrades.
While an evaluation of the cap rate can help you determine the viability of a prospective investment property, there are many factors in making a sound investment decision. Call on the professionals at KerNors Capital Group to help.
In our nearly ninety years in the investing business, we’ve learned that you need to evaluate each investment opportunity individually. Cap rate is certainly a good basic evaluation tool, but you’ll want to go further to be sure you’re putting your money where it will bring the most return.
For example, if the investment you are analyzing has a large retail component to it, you’ll want to pay attention to additional financial metrics. An Investopedia article refers to it as the “Four R’s of Retail”. Return on revenue, assets, capital, and capital employed are critical measurements that will help you assess the financial health of a retail business.
The Range Of Investments
Few investments offer the variety and diversity of commercial and industrial properties. From investments in multifamily housing to office space and mixed use properties, and from factories to warehouses and distribution centers, your choices are many.
You can choose to start with smaller multifamily properties and retail establishments, working your way up to apartment complexes, office buildings, and malls. Every investor started somewhere and the professionals at KerNors are ready to help at every stage.
Expert Help When You Need It
Every investor needs help at some point in the process, from the young couple crafting a sensible investment strategy, to an experienced investor moving into a new and unfamiliar area. Since 1924, our professionals have prided themselves on being there to offer each individual exactly the support they need. Call today.