Things to consider before investing in commercial property

If you’re new to the commercial real estate game, then this list will be indispensable in decoding jargon, understanding concepts and generally avoiding looking like a novice when it comes to brokering your deal.

  1. Understand How to Value Commercial Real Estate – Unlike residential property, the value of a commercial piece of real estate is intrinsically related to the number of square metres it has, with this number often being quoted along with the price. Be sure to evaluate and get a feel for similar properties Rand/square metre values, to see if you’re getting a good deal or being ripped off.
  2. Know that Leases on Commercial Property are Longer than Residential Property – According to Investopedia, commercial lease lengths are greater than that of residential lease lengths. The implication of this on your forecasts for future earnings would mean that, should you own the property and wish to lease it out, you will have secured a larger number of fixed payments. This is an excellent position to be in, because it removes some future uncertainty risk with regard to income.
  3. Understand what Net Operating Income is – Net Operating Income (NOI) is the value of Gross income in the property’s first year, minus the operating costs for that year. This value is a good indication of future profitability and return from the investment.
  4. Understand what Cash-On-Cash is – This measure provides you with a return figure based on the cash you paid as deposit for the property, vs the cash you receive from the property. It is often calculated for the first year and then compared to other properties to determine attractiveness.
  5. Understand what the Cap Rate is – The cap rate or capitalization rate, is the rate of return of the property based on the income that you expect it to generate. This rate is good to quote as it provides a yardstick with which to compare different investments. It does make some limiting assumptions which may be violated in the future, like constant annual income. But for an initial measure, it is sufficient.

Armed with this knowledge, you can now make more informed decisions the next time you look into a commercial property investment.