When it comes to making commercial real estate investments, investors must consider the expected returns before making a decision. Rational investors always base their choices on facts and numbers rather than on opinions and assumptions. This is where an understanding of the key metrics/terms can be helpful when looking to invest in a strip mall, retail center, shopping mall, or any other commercial property.
To help you out, we’ve explained some of the most critical metrics/terms you should use before investing in a commercial property.
Internal Rate of Return (IRR)
The Internal rate of return helps you measure a commercial real estate project’s profitability, cash flow, property sale proceeds, as well as account for the initial investment costs. Look for projects with a high IRR.
Return on Investment (ROI)
The ROI is valuable metric for any type of business or project. It works for commercial real estate investments in the same way as for other endeavors. Based on the premise that you can’t manage your future investing without knowing how an asset performed in the past, the ROI offers a dependable analysis of the deal’s past performance.
Loan-to-Value Ratio (LTV)
LTV is among the most commonly used metric for assessing risks. A higher LTV ratio could mean additional investment costs in the form of higher interest rates or more insurance obligations. Hence, the higher the LTV for a commercial real estate investment, the higher the risk.
Capitalization Rate (Cap Rate)
Used for both residential and commercial real estate, capitalization rate is the yield on cost, expressed as a percentage of the purchase price. It allows you to compare properties in the same asset class with different characteristics. However, as merely a snapshot, the metric tells investors nothing about the expected growth in rents, expenses, and property value. Nor does it say whether a leverage can help increase your return.
This metric measures the total cash return for an investment over its entire lifespan. It can be referred to as return on equity, multiple on equity, or multiple of invested capital. The metric helps you unveil how many times you can get your capital back on a given investment. For example, an equity multiple of 2x on your $10,000 investment means you’ll get $20,000 back through sales, cash flow, and refinance proceeds over your investment period.
Real Estate Investing In NY, NJ, and FL
Commercial real estate stakeholders like investors and brokers need to evaluate different investments before investing their hard-earned money. This requires a clear understanding of certain metrics, without which they might end up making poor investment decisions. While commercial real estate terminology is quite extensive, learning the basic terms explained above should give you a great start.
If you’re an investor looking for lucrative commercial real estate properties, reach out to Milbrook Properties Limited today!