Then treat the purchase like an investor by calculate CAP for the property and comparing to similar opportunities. The CAP rate typical for the market will fluctuate over time, with interest rates, and differ by property class.
If you are considering the purchase of commercial unit in which to operate your business, follow these simple steps to quickly evaluate the purchase as property investment yields. Please consult your accountant for regarding other financial benefits of property ownership.
- Identify the total monthly ownership expenses for the space
- Estimate the total projected annual net rent for the space
- Calculate the CAP rate and compare to market rates
An example:
You have the opportunity to purchase a commercial space. If your business outgrew the space, you could rent out the space $3,000 per month ($36,000 annually). Your annual expenses as a landlord (e.g. base year taxes, etc) are $11,000. Therefore, the NOI is $25,000. If you were offered the space to purchase at $500,000, would that be considered a good deal? One way to compare the opportunity with other property investment opportunities is to compare the CAP rate.
At $500,000; the CAP rate of this purchase would be 5%. If the current market averge is 3%, move quickly to investigate the opportunity. But if the current market average is 7%; you are at risk of overpaying by nearly $150,000!
The bottom line: Property stats and ratios aren't just for Big Deals....savvy buyers know how to compare their largest asset (or largest purchase) to the available alternatives. Understanding real estate stats can help you spot where Dollars and Cents make sense!
No comments:
Post a Comment