Commercial Real Estate’s main goal is to produce cash flow from its net income after all expenses paid by the owner.
When equity by the owner is placed into the investment property or income property an expectation of a cash on cash return from the property rent is the goal, including a capital appreciation over years to also occur.
There are a few important elements that can help to assure success of these outcomes. Below are a partial list of the important elements to have a better chance of success.
- Purchase a property in a highly growth area that shows the energy of expansion or stability with proper ratios of business and residential and entertainment along with necessities. The building itself should be generic that can accommodate a host of tenants now and in the future that can utilize its characteristics.
- The location should most likely be highly visible on the main streets if retail in nature or convenient with easy access and proper parking if office or medical. The mixture of tenants, if multi tenant structure like shopping centers should feed off each other and not be similar in nature.
- Smaller tenants need big box draws to help with their success. The demographics of the community must be of a certain status in order for the tenants to survive and prosper.
- Population growth, home median income, age , disposable income and home values are important components in the potential SUCCESS of its business community.
- If a loan on the property is too highly leveraged, the owner may have financial difficulty if anything goes wrong with the neighborhood or the tenancy itself. No room for error is not the best idea.Fifty to sixty five percent loan to value is more sensible when taking out a loan.
- What is an expected cash on cash return if the property is highly conservative or a more risk slanted investment? Three to seven percent are numbers that are normal in the income property world. Of course, when first determining the purchase little or more due diligence will most likely contrast the poor to great investor.
Tags: cash flow, commercial real estate, net income