One Daily Minute
What Every Commercial Real Estate Investors Should Know - Part 1
Thinking about buying your next apartment building?
Use these metrics when analyzing your next commercial real estate investment.
These metrics takes into account the numbers associated to the project:
Costs associated with the purchase
Expenses during your hold period
Projected income during holding years
And sales price when exiting.
Photo by Brayden Law
Capitalization Rate (Cap Rate)
The cap rate
is the expected return to be generated on a real estate investment property. And on an unlevered (no debt) basis.
To get the cap rate:
Take the current net operating income
And divide it by the sales price of the property.
If you bought a property for $1 million.
And the net operating income was $100,000.
You would have both a 10% return. And a 10% cap rate.
Return on Cost (ROC)
Great for value-add investment properties.
The return on cost takes the net operating income once stabilized—and divides it by total project cost (purchase price plus cost of improvements).
It’s a way to see how much value is created once you stabilize the project.
But be careful, as this is forward looking—and still needs to be actualized.
Cap Rate Exit
The exit cap rate is important to predict the projected sale value of your property—at the end of the hold period.
The lower the cap rate you can sell for—the more profit you can make.
Your commercial real estate is netting $1 million a year.
Selling at 7 cap rate, would yield you a $14.2 million selling price.
But selling at a 5 cap rate would yield you a $20 million selling price.
By selling at a 5 cap rate—instead of 7 cap rate:
You can make almost $6 million more.
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