Like any investor, you’re thinking about return. And when it comes to commercial real estate, many factors can play a role on the return you reap from your investment. So whether you’re considering investing in office buildings, warehouses, industrial property, apartments, retail or mixed use properties, you want to make sure you have a handle on the factors that affect your return.
So what drives higher returns? And what sinks them?
Here’s a quick look as some of the biggest factors that can affect your CRE return.
Operational and other expenses
Are you paying a property management company? Are substantial renovations necessary to make the property operational or bring the building up to code? Are there ongoing, large expenses you didn’t anticipate? All of these expenses will affect the return on your CRE investment. Taxes are also a consideration; if you have an investment property you rent out, the tax implications, including deductions, are many. These factor in to your overall return on investment.
Demand and property valuation
When demand for property skyrockets, so does the cost of acquiring a property, as explained in www.realcommercial.com, “Yield: what is it & what drives it in commercial real estate?” When you purchase CRE in a hot market, the potential yield from that property then becomes lower. In addition, property valuation has an impact on your insurance premiums and taxes.
More, demand fluctuates, and that can affect the income you get from the eventual sale of the property itself, affecting your capital gain and total return. So if you buy when demand is high and then it suddenly plummets, the valuation of your property is likely to fall as well, having a negative effect your return.
Occupancy rates and income
Your yield from your CRE is tied to a large extent to your occupancy rates. If you’re constantly seeking tenants for your strip mall and can’t get good long-term tenants in the door, your income, or return, is going to suffer. But if you made wise choices on the front end and are providing an irresistible commercial rental property to interested businesses, your return is likely to be favorable. When considering your property’s potential cash flow, it’s also important to remember that inflation typically benefits landlords, as it drives rental income. Of course your full return depends on your income and capital gains, minus your expenses, according to www.commercialrealestate.com, “Factors Affecting Your Return.”
The most important factor for turning a profit on your CRE investment? Location, according to www.investopedia.com, “The Most Important Factors for Investing in Real Estate.” The right location in the appropriate neighborhood with great amenities and access to transportation plays a huge role in your investment possibilities. Purchase commercial real estate intended for apartments in an area soon to be overtaken by noisy manufacturing businesses, and your return is likely to suffer as is your property valuation. Experts recommend taking an in-depth look at the surrounding properties and their intended use to get a long-term picture.
CRE returns: influenced by a complex set of factors
The returns you can realize on your commercial real estate investments are dependent on a number of factors, creating a complex picture to contemplate. Surround yourself with a team of experts who can provide you with the intel you need to make wise decisions, and your investments are more likely to pay off in the long run.