As a current or intending real estate investor, you may have repeatedly heard that commercial real estate is a higher-yielding and more profitable investment than residential real estate, because of the high return on investment (ROI) that it generates. Still, you might want to know what exactly is a good return on investment for commercial property?
What Is a Good Return on Investment for Commercial Property?
A good return on investment for commercial properties falls between 5% and 12%. While this is an average figure, it should be noted that a ‘good’ return is based on conditions such as property type and the local market. Basically, what may be considered a good return on property A may not be a good percentage for property B.
The return rate mentioned above is quite high when compared to the 1% to 3% generated by residential properties. This difference is mainly caused by the length of the purchase and sale agreement. Whereas with residential properties, leases last a maximum of two years, leases for commercial properties can go on for close to a decade or more.
Return on Investment and Profit
Return on investment is often misconstrued to be equal to profit generated from investment. Unlike ROI, however, actual profit is generated only after sales. To keep things simple, investors looking to gain profit through sales should not be concerned with ROI, and investors looking to gain income through leases should not be concerned about the final resale value.
This is because a property could sell at a lower price than its market value, due to market conditions, thereby reducing the profit, and by extension, the final ROI calculation. Also, costs incurred during sales such as broker commissions, appraisal costs, and repair costs also reduce the sales amount, thereby reducing the profit generated.
How to Boost Return on Investment for Commercial Property
While some investors have goals of achieving long-term financial freedom via investing, some others just want a means of constant and reliable cash. Whatever your investment goals are, one thing to keep in mind is that their success largely depends on the extent of returns you can generate on your individual investments.
It is safe to say that if you are not getting any returns on your investment, you are running at a loss as a result of depreciation. To prevent this loss and maximize returns on your commercial property, here are a few strategies you could implement:
While aiming to reduce vacancy rates of their properties, property owners should also avoid renting out buildings at low rates in a bid to attract customers, as this only reduces ROI generated. Rent increments should be implemented regularly to match factors such as rises in the inflation rate, increases in property taxes, utility costs, etc.
This also means that the rent of commercial buildings would vary based on location. For example, Illinois charges a yearly property tax of about 2.27% of the house value, while Kentucky has an average property tax of 0.83%.
You could generate a higher return from your investment by reducing the operational costs you spend on it. For example, relying on solar energy to generate electricity, switching to energy-efficient lights or finding cheaper cleaning services could go a long way in cutting costs.
You should also keep in mind that most potential tenants would rather go for properties that are energy approved, especially if they are large buildings. Examples could include apartment complexes or industrial buildings.
To boost your returns, you could implement changes on your commercial property that would make it more desirable to potential clients. These might include installing amenities such as green spaces, central air -conditioning, extra lighting in garages, and swimming pools.
Make Use of a Real Estate Agent Service
Hiring a good realtor service such as Si Vales Valeo Real Estate, could increase the returns generated on your investment. Not only will they provide your property with the needed exposure, but they would also broker the best deals with tenants in terms of GRM and other costs.
How Do I Calculate ROI on My Commercial Property?
Two ways through which you can calculate your ROI are:
- ROI = Net Return on Investment/Cost of Investment ✕ 100%
- ROI= Final Value of Investment/ Initial Value of Investment ✕ 100%
How Can I Increase the Value of My Commercial Property?
You can increase the value of your commercial property by carrying out routine maintenance as well as by improving the state of the infrastructure. Here are a few maintenance and renovation tips:
- Regular inspection of electrical systems (lighting, electrical sockets, and air conditioning)
- Repair of faulty doors, broken tiles, chipped paintings, broken cabinets, and other infrastructural damages.
- Regular inspection of plumbing systems (water pipes, taps, toilets)
- Increase in security measures, such as hiring guards, extra lighting in garages and along pathways, CCTV, etc.
Despite the risks present in commercial real estate, getting a good return on investment on your commercial property is very possible and can best be achieved by practicing the strategies listed above. To get impressive results, you could also hire the services of a professional real estate agent, like Si Vales Valeo Real Estate.