Investing in commercial real estate can be incredibly lucrative. But not every property is going to produce the same income, which is why you need to evaluate each potential purchase carefully. That’s where ROI comes in. Short for return on investment, the ROI of your commercial property is a metric that calculates the ratio of your profits against the cost of the investment.
ROI is essential because it represents the potential of an income-producing property. A higher ROI means you expect to get more profits compared to the initial costs. As an investor, this is something you’ll want to examine closely before making any purchase decisions.
Calculating the Potential ROI of a Commercial Property
The formula for calculating ROI is simple enough.
ROI = (Investment Proceeds – Investment Cost)/Investment Cost
For example, if you invested $1 million in a commercial property and your proceeds were $1.2 million, your ROI would be 20%. Assembling the figures you need to calculate the ROI accurately is just as important. Here are some essential ones:
This should be the first figure you nail down. It’s what you are paying to acquire, improve, and maintain the property. It includes things like:
- Property purchase price
- Property taxes and insurance
- Property improvements
- Property management costs
- Any other operating expenses
How much income do you expect to make from the property? One of the main components of this figure is rental income. If you plan to lease the property, calculate the rental income you expect to receive. If there are tenants already in place, this might be simple. Otherwise, you’ll need to conduct a market study. Don’t forget to account for potential vacancy periods.
The other element of this is property appreciation. Your commercial realtor can help assess each property and its potential by considering the area, property type, and other economic trends.
Evaluating the Potential ROI on Various Commercial Properties
Once you calculate the potential ROI on a property, how do you know if it’s a good investment or not? In general, a good ROI in real estate is considered to be at least 8-10%. But, because commercial properties have longer lease terms, higher rental rates, and fewer vacancies, they can often generate ROIs higher than those of residential properties.
But ROI isn’t the only factor you’ll want to consider when evaluating commercial real estate. Your due diligence should include taking a close look at other things, such as market conditions, future growth potential, and possible risks.
Caldwell Commercial Can Help You Find the Right Commercial Property
Whether you choose to buy or lease commercial real estate in the Charleston, SC, area, you need a partner you can trust so you can get the best return on your investment. Caldwell Commercial Real Estate is a team of real estate and property management professionals with more than 80 years of combined industry experience. We will use our in-depth knowledge of the area and industry to guide you to the right piece of property and help you achieve your business goals. Contact us today.