Published on November 22nd, 2015 | by Day Trader
How to Secure Your Financial Future Through Smart Real Estate Investments
Investing in commercial real estate is a great way to secure your financial future. Many financial experts say that commercial real estate is one of the most stable investments that can be made in the United States, especially in our current market. Commercial real estate costs have gone down by 30% since 2012, making a buyer’s market. After acquiring real estate, many investors use commercial real estate management companies to manage the properties so that with little work, they enjoy a constant cash flow from renting or leasing it, while gaining an asset that can be sold for more in the market upswing.
To make a good investment in commercial real estate, it is essential to understand how it works. To quote Warren Buffet, the most successful investor in the world, “Risk comes from not knowing what you?re doing.” Before making an investment into commercial real estate, you should become familiar with how it works:
- Understand what generates the greatest cash flow. We all know the three most important rules making a good real estate investment: location, location, location. With commercial real estate, there are several other considerations that make it a good investment. Commercial real estate management companies heavily rely on the square footage and zoning to determine competitive leasing rates. Also, the number of units your property has increases the rent generated in multiples.
- Create a plan of action. Before you jump into a long term investment, make sure you know all the facts. Interview commercial real estate management companies so you know your investment to know what the cost will be. Get a full picture of real estate development funding requirements. Many real estate development financing companies will want you to have at least 30% to put down at closing.
- Understand the numbers. The following calculations help give you a clear picture of how smart your investment is, in numbers that don’t lie:
- Net Operating Income (NOI). The NOI is calculated by adding all the income a property generated over the last year, less the operating expenses incurred. For example, if the rent generated for a property is $90,000, while operating expenses were $40,000, your NOI is $50,000. You want to invest in a property with a positive NOI, indicating it profits more than it costs to maintain.
- Capitalization Rate. The capitalization rate will tell you how long it takes for your investment to be profitable. For example, if your property costs $2 million and has an NOI of $200,000, the capitalization rate it 10%. This tells you that your property will have paid for itself in 10 years.
- Cash-on-cash return. Since a real estate investment is usually a mixture of cash and financing, the cash-on-cash return is a ratio that shows you how much of the money out of your pocket in the first year is actually returned. For example, if your down payment on a $2 million property is $600,000 (the typical 30%) and has an NOI of $50,000, the cash-on-cash return for the money you invested is 8.33%.
Do you have any good information on investing in commercial real estate that we didn’t include? Please add it in the comment section below.