My Landlord Insurance Blog

Commercial Real Estate Investing- Overview

Friday, August 12th, 2011 | Real Estate

When we hear the phrase “commercial real estate,” we envisage properties like the empire state building, local regional mall or a large hospital. However, the actual world of commercial real estate is much extensive and even includes the small strip mall, where you get your espresso and hair cut. Commercial real estate is found on numerous streets in almost every city.

What are the Property Types?

The core property types in commercial real estate consist of office buildings, retail centers, industrial buildings and multifamily units (apartments). All these share the common thread that they are occupied by tenants who pay to lease space. However, different types of tenants come into different categories. For example, while the stores at your mall may change frequently, your doctor may have been in the same place for the last ten to twenty years. Retail occupants are relatively cheaper to replace than office tenants, but need replacement more often, whereas office tenants are hard to replace but tend not to move around.

What is Net Operating Income

The essential determining factor of commercial investment property is its net operating income (NOI). NOI is calculated by summing up a property’s annual rent and reimbursements and subtracting any expenses which are neither capital nor tied to leasing new space. Commercial properties are valued by comparing their NOI by the sale price or value, which is called a capitalization, or “cap,” rate. No matter, what the cap rate is, the higher a property’s income, the higher its value will be.

Financial Factors

You must take into account capital expenditures and leasing costs while calculating property’s NOI, because they impact your total return. If you require help to understand what your true returns, you can seek guidance of a local expert in the field.

Financing

The financing for commercial property is mainly based on the income that it generates. Lenders carefully deem the “debt coverage ratio,” which is determined by dividing the cost of a year’s NOI by a year’s mortgage payments. If the NOI is found to be far less than the mortgage payments, the bank never sanctions the loan. This is, exactly, the opposite of residential real estate, where the loan is made, based on the borrower’s ability to repay it.

Final thought

Just like any other investment, commercial real estate requires attention in order to succeed. Remember, your job is not only to invest money to maintain the building, but also to invest on occupancy or rents, in order to increase the NOI.

2 Comments to Commercial Real Estate Investing- Overview

Leave a comment