There is a lot that goes into commercial property investing – especially if you are a beginner. It can come with numerous advantages if done properly, including a steady cash flow and higher income potential. It’s a good idea to sign up for newsletters and email lists that keep you updated with all of the best opportunities and commercial property investment tips.
Familiarizing yourself with important commercial real estate metrics is also essential. Here is some terminology that successful property investors understand:
- Net operating income or NOI is calculated with the property’s 1st-year gross operating income minus the operating expenses. Therefore, a positive NOI is ideal.
- Holding Time – When looking into potential properties, determine what would be an ideal time frame for holding on to them, whether they should be leased out immediately if any work will need to be done first, and so forth. For a flipping strategy, buying and selling within one year is usually ideal.
- Value Add Properties – This type of property will have a holding time ranging from 1 – 3 years. The term “Value Add” means that it will likely require renovation and deferred maintenance. In addition, the exterior or landscaping needs some improvement.
- Appreciation – You’ll see this often mentioned in commercial property investment tips. Understanding the potential appreciation of properties helps determine the holding time. Look into things such as the demand for the land/space to build in that area, the decrease or increase in the rental prices, whether there is steady population growth, and so forth.
Commercial Property Investment Tips List Continued
- Cap Rate – The capitalization rate refers to the calculation of the value of potentially income-producing properties. What kinds of commercial properties are “good candidates” for determining a cap rate? A couple of examples would be a small strip mall, commercial office buildings, or multi-family complex of 5+ units. The cap rate estimates the property’s net present value of future cash flow or profits, as well as the calculated potential for earnings.
- Rental Property Pro Forma – Learning about this type of report and how to read it is one of the most important commercial property investment tips. The Pro Forma report contains the commercial property’s current and estimated income/expense data to project the cash flow and net operating income.
This article is just a quick overview of some of the critical terminology you should know if you consider becoming a landlord/lady, house flipper, or another type of commercial investor. Get even more commercial property investment tips by looking into Motley Fool Millionacres. It offers excellent recommendations, resources, and information to help real estate investors.