Commercial real estate investments such as office buildings, retail space, industrial sheds and warehouses are considered as a reliable source of regular income for many investors. Those who invest in commercial property benefit from its strong earning potential, long lease periods, price stability and other features. The process of investing in commercial real estate can be simplified by following certain rules that help in determining if it is a lucrative deal.
A comprehensive list of common rules for investing in commercial real estate are:
- Location: The rent and appreciation of commercial real estate is dependent on its location. When investing in commercial real estate, ensure that the location is one that will attract more tenants and reduce vacancies.
- Quality Tenants: Invest in a commercial property that is likely to attract quality tenants. The benefit of such tenants will be that they will be particular about paying their rent on time and stay for longer durations.
- Capitalization Rate: The ratio between the Net Operating Income and value of property is referred to as Capitalization Rate. This rate is used to determine the value of property as per the current rate of return in the market. A minimum of 8 to 10 percent cap rate is recommended for property to be able to generate sufficient income for covering risks and expenses.
- 50 Percent Rule For Expenses: As per this rule, the non-mortgage expenses (maintenance, vacancies and other charges) of commercial real estate should not exceed 50 percent. This rule helps in estimating cash flow every month and managing expenses accordingly.
- Debt Coverage Ratio: Calculate the property’s DCR (Debt Coverage Ratio) i.e. the ratio of the Net Operating Income to that of the Annual Debt Service. Net Operating Income refers to the property’s potential income after deducting operating expenses, credit loss and loss due to vacancy. The Net Operating Income should be around 20 percent more than the debt service.
- The 1 Percent Rule: This rule helps in estimating the worth of property being pursued. As per this rule, commercial property should generate a minimum rent equivalent to 1 percent of its purchase price as rental income.
- Mix Units: Investing in diverse commercial properties builds your real estate value and generates consistent income for years.
John Reider Properties offers a variety of commercial real estate properties to its clients. Our team assists the clients in finding an ideal commercial property. We have years of knowledge and experience in commercial real estate market. To know about rules of commercial real estate investments, visit us at 455 E. Central Texas Expwy Suite 101, Harker Heights, TX – 76548. You can also call at: (254) 699 – 8300.