by Prince Licaylicay | Jun 30, 2021 | All Articles, Buying, Investing
When you are planning to purchase commercial real estate as an investment, you would always analyze if the property you’re buying is a good deal or not. You weigh out all the factors and specifics if the property is really worth investing in. Being a diligent investor, you always consider the potential returns by using different metrics before making an investment decision. You wouldn’t risk losing your money onto a property that will not yield strong returns, right?
One of the important metrics in assessing a commercial real estate investment is the Capitalization Rate. This article will talk about cap rate, its importance in commercial real estate investing, and how to calculate the cap rate and determine if it is a good cap rate, or a bad one.
What is a Cap Rate?
In commercial real estate (CRE), Capitalization Rate, or commonly known as “cap rate”, refers to the return metric that is used to determine the potential return on investment or payback of capital. It is a rate used in CRE to estimate the rate of return on a property based on the net operating income (NOI) that the property generates—expressed as a percentage, usually somewhere between 3% and 20%.
A property’s cap rate is a factual snapshot of a commercial real estate asset’s return. It simply represents the yield of a property over a one-year period assuming the commercial property is purchased on cash and not on loan.
How to Calculate Cap Rate
For something fundamental as a cap rate, the good thing is—it is not complicated to compute. For you to be able to calculate the commercial property’s cap rate, you’ll need two (2) things:
- Net operating income (NOI) of the commercial property
- Purchase price of the commercial property
Using these two (2) elements, you can easily compute the commercial property’s cap rate by using this formula:
Capitalization Rate = (Net Operating Income (NOI) / Purchase Price) x 100
To calculate the cap rate, you take the net operating income (NOI) and divide it by the purchase price of the commercial property. Since cap rates are expressed as a percentage, you multiply it by 100.
To better understand the equation, it is helpful to break down the components and explain them individually. A property’s annual Net Operating Income (NOI) is the income minus expenses and the purchase price is the assessed sales price. If for instance, the purchase price is not available, the current market value or the appraised value can be used. Generally, cap rates have an inverse relationship to the property value. With that being said, the higher the cap rate, the lower the purchase price, and vice versa.
For further explanation of the terms like the net operating income (NOI), check out our article 25 Real Estate Terms You Should Know.
Importance of Cap Rate
The cap rate is commonly used by investors in deciding whether to pursue a commercial property or not. It is also used as a baseline in comparing investment properties in a given market.
When comparing commercial properties in the immediate market, you see a property that has a cap rate of 6.75%, another property at 7.35%, and a third property at 7.50%. While the property you are planning to purchase has a cap rate of 7.10%. This will tell you that the property you’re purchasing is in the middle and is fairly comparable to the expected returns and sales prices of other commercial properties that are listed in the market.
However, if you see that the other properties in the market have low cap rates around 4-5%, then it is a red flag. Why would the commercial property you’re eyeing sell for such a low price compared to the amount of income it can generate? Or is there something wrong with the commercial property you’re planning to purchase?
Another importance of cap rate in CRE is that it can be an indicator of potential risk. Commercial properties with higher cap rates tend to be in developing areas and thus come with more risk. While commercial properties with lower cap rates are found in areas that are more stable and with great demand. That’s why it comes with higher purchase prices.
In other words, using a commercial property’s cap rate may be helpful when looking to value a property at purchase and to compare that particular property to the sales of other similar properties in the market.
What is a “Good” Cap Rate?
A question that is asked by many people who are new to the real estate industry. The short answer is, it depends on how the cap rate is being used. Let’s say you are selling a property, having it be at a lower cap rate is good because the value of your property will be higher. On the other hand, if you are an investor planning to purchase a commercial real estate property, typically you would go for assets that have a higher cap rate so that your initial investment will be lower.
Although cap rate is an important metric being used in comparing investment opportunities, investors should not only base his or her decision in purchasing a property solely on cap rates alone. A good investor always considers all the elements that make up a property.
In addition, it is important to keep in mind that different cap rates represent different levels of risk. A low cap rate poses a lower risk, while a high cap rate poses a higher risk. With that being said, there is no “ideal” cap rate—it all depends on the investor’s risk tolerance.
Even after outlining all the information above, investing in CRE can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE
by Phill Tomlinson | Jun 21, 2021 | Blog
An Estoppel Certificate, also known as an Estoppel Letter, is a document used in Commercial Real Estate (CRE) to describe the details of a lease agreement or to verify certain representations made by the landlord.nnAs a CRE investor buying a commercial property with existing tenants, there is a key piece of due diligence to execute before the transaction is completed, that is in the form of an Estoppel Certificate.nnEstoppel Certificates are extremely important and is part of the due diligence in purchasing a commercial property. As an investor goes through the process of purchasing a commercial investment property it helps remove liability to the new owner (investor) in certain matters with the existing tenants of the property.nn n
What does it contain?
n nnThe details will include the amount of rent, amount of security deposit, length of the lease, and any special provisions that the landlord has allowed the tenant for the buyer or lender to be aware of before completing the proposed transaction. Essentially, the terms of the agreement between the landlord and the tenant.nn n
Why do you need an Estoppel Certificate in CRE? Is it useful?
n nn
nnIf you are an investor looking to buy a commercial property with existing tenants, a huge part of the due diligence process is verifying the tenants’ monthly rent, payment history, and the relationship that the current owner or the landlord has with the existing tenants. Let’s say you are looking to buy a property from a landlord that has four (4) tenants and is claiming that these tenants pay $4,700 per month with a lease term of 5 years, how would you know he is telling the truth? What if the tenants are only paying $4,300 a month, and the lease contract is not confirmed, nor signed by both parties?nn nnFor these instances, an Estoppel Certificate is useful as it provides an accurate, factual nature of the agreement between the landlord and the tenant. Furthermore, it gives you the protection for such claims as you go in and purchase the property.nn nn n
Other uses of an Estoppel Certificate in Commercial Real Estate
n nnAn Estoppel Certificate can also be used if the owner of a property wants to refinance, or purchase a property and use the current as collateral – in this case, the bank or financing company will ask for an estoppel certificate for each tenant since it includes bank statements, checks, pay stubs, and credit history. If such document proves that the property is likely to have good cash flow, it can help the lender in the decision-making process to approve the refinance requested by the owner or buyer.nnIn short, an estoppel certificate provides a level of confidence for both the investor and the lender.nnIn rare cases where there are matters that are unresolved by simply reminding the tenants of their estoppel agreement, and a situation moves to small claims court, an estoppel agreement is a legally binding document to prove you as the investor, have set forth terms that were agreed by the tenants for the court to take into consideration.nn nn
nnEven after outlining all the information above, investing in CRE can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.nn nnNeed help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!nnn nnPhill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns. nn nnBookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCREnn nn
by Prince Licaylicay | Jun 21, 2021 | All Articles, Investing
An Estoppel Certificate, also known as an Estoppel Letter, is a document used in Commercial Real Estate (CRE) to describe the details of a lease agreement or to verify certain representations made by the landlord.
As a CRE investor buying a commercial property with existing tenants, there is a key piece of due diligence to execute before the transaction is completed, that is in the form of an Estoppel Certificate.
Estoppel Certificates are extremely important and is part of the due diligence in purchasing a commercial property. As an investor goes through the process of purchasing a commercial investment property it helps remove liability to the new owner (investor) in certain matters with the existing tenants of the property.
What does it contain?
The details will include the amount of rent, amount of security deposit, length of the lease, and any special provisions that the landlord has allowed the tenant for the buyer or lender to be aware of before completing the proposed transaction. Essentially, the terms of the agreement between the landlord and the tenant.
Why do you need an Estoppel Certificate in CRE? Is it useful?
If you are an investor looking to buy a commercial property with existing tenants, a huge part of the due diligence process is verifying the tenants’ monthly rent, payment history, and the relationship that the current owner or the landlord has with the existing tenants. Let’s say you are looking to buy a property from a landlord that has four (4) tenants and is claiming that these tenants pay $4,700 per month with a lease term of 5 years, how would you know he is telling the truth? What if the tenants are only paying $4,300 a month, and the lease contract is not confirmed, nor signed by both parties?
For these instances, an Estoppel Certificate is useful as it provides an accurate, factual nature of the agreement between the landlord and the tenant. Furthermore, it gives you the protection for such claims as you go in and purchase the property.
Other uses of an Estoppel Certificate in Commercial Real Estate
An Estoppel Certificate can also be used if the owner of a property wants to refinance, or purchase a property and use the current as collateral – in this case, the bank or financing company will ask for an estoppel certificate for each tenant since it includes bank statements, checks, pay stubs, and credit history. If such document proves that the property is likely to have good cash flow, it can help the lender in the decision-making process to approve the refinance requested by the owner or buyer.
In short, an estoppel certificate provides a level of confidence for both the investor and the lender.
In rare cases where there are matters that are unresolved by simply reminding the tenants of their estoppel agreement, and a situation moves to small claims court, an estoppel agreement is a legally binding document to prove you as the investor, have set forth terms that were agreed by the tenants for the court to take into consideration.
Even after outlining all the information above, investing in CRE can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE
by Phill Tomlinson | Jun 17, 2021 | Blog
For sure, all of us are dreaming to have an investment that generates income, producing a steady cash flow while appreciating its value over time, right? As long as it was executed well and with due diligence, it can potentially give us big returns in the long run, and that includes Real Estate Investment.nn nnAny type of property, may it be residential or commercial, can be a good investment opportunity. Moreover, this article will focus on commercial real estate investment and the strategies you could use in order for you to create a diversified portfolio in the commercial real estate business.nn nnNow, the question in your mind would be, ‘Why commercial real estate and not residential real estate?’ ‘What are the advantages and benefits I could get from it?’ Let me go ahead and give you some key takeaways that could help you decide to go for commercial real estate Investment.nn n
n
- High Income Potential. Investing in commercial real estate over residential gives you higher income potential. Typically, the annual return of commercial properties depending on a lot of factors ranges between 6% and 12% compared to residential that is only 1 to 4%. That’s thrice you’re getting!
n
n n
n
- Triple Net Leases. A brief explanation would be, you as the property owner will only have to pay for the mortgage. All other property expenses, including real estate taxes will be handled by the lessee. In short, you get to enjoy the benefit of having the lowest maintenance income producers for your money.
n
n n
n
- Stable and Safe. We can’t deny that there are risks imposed in every business purchase. However, investing in commercial real estate business among other investments is a safer option. Stocks and bonds are liquid assets and ever-fluctuating in the market, while the tangibility of assets in the form of commercial property demonstrates stability making it a safer option.
n
n nnThese are just a few of the many reasons why investing in commercial real estate is a good decision that could potentially reap big rewards over time.nn nnWhile it sounds tempting to get involved in the commercial real estate business right away, “investment”, in general, is not guaranteed to have big returns. Any investor understands that there are risks involved that could lead to big losses of money, and any successful investor did not achieve a diversified portfolio overnight. It takes time to learn the basics and fundamentals in the real estate industry. Having said that, investors practice, practice, and practice until they’re good in this type of field. Here are some tips to become the next successful real estate investor:nn nn 1. Educating yourself on commercial real estate investment by:n
n
- reading commercial real estate books and articles
n
- getting the latest updates online about the commercial real estate industry
n
- watching videos on YouTube
n
- having conversations with other investors to gain more knowledge
n
- joining real estate investing groups
n
n nn 2. Choose your property type before finding an investment strategy is a good approach to CRE investingnn n
Commercial properties are classified into 5 major categories:
n nn
n
n
- Multi-family (multi-residential or
n
n apartment buildings)nn n
n n
n
- Retail (malls, strip plazas, grocery stores)
n
n n
n
- Industrial (warehouses, pharmaceutical
n
n facilities)nn n
n
- Hospitality (hotels, medical centres)
n
n nn nn 3. Determine your risk vs. reward tolerancen
n
- This is the part where you gauge yourself on how far are you willing to go in buying that commercial property. At the end of the day, the bigger the risk, the bigger the reward.
n
n nn n
4 Strategies in Commercial Real Estate Investing
n nnOver the past years, investors have been using different types of strategies in purchasing a commercial property. Since there are a lot of factors to consider in a CRE investment, investors want to make sure that they are putting their time, effort, and money into something that could grow in the near future. These are the 4 major strategies in commercial real estate investment:nn n
n
- Core Assets
n
n nnThe most conservative, consistent, and “safest” among all. These assets are class-A, institutional, usually super-well-located buildings that are occupied by very high-credit tenants. This is a strategy where investors value dividends in their portfolios. Since core assets have a low-risk profile, hence the returns are also small, usually from 6% to 8%.nn n
n
- Core-plus
n
n nnThis is quite similar to core but with a little bit of risk involved and is the least common among the four. This type of real estate is fundamentally strong, stabilized, but can still be improved to enhance returns. Since there’s the element of risk, such as lease expirations and age of the building resulting to mild renovations, core-plus assets generate leveraged returns ranging from 9% to 12%, depending on a variety of factors.nn n
n
- Value-added Assets
n
n nnThese investments include properties that have larger renovation or operational improvement to add necessary value that could ultimately drive enhanced returns. An example would be an apartment building built in the 90’s with units in original condition that require a major interior renovation.nn nnSince there’s a significant risk in this type of investment, it also has significant upside if things go well as planned and the returns will be higher on the deal, typically ranging from 13% to 16%.nn n
n
- Opportunistic
n
n nnThe most risky investment strategy in commercial real estate investing. These are distressed buildings that require a lot of renovation and have a high vacancy rate. Opportunistic investment includes ground-up development and purchases of land.nn nnThis strategy entails a greater level of risk but has the potential for the most return as well. These assets, when executed properly, can generate 15%+ internal rate of return (IRR).nn n
n n
n nnCommercial real estate properties are assets that can generate money through rental income or appreciation of its value over time. There are 5 major categories in commercial real estate: multi-family, office space, retail, industrial, and hospitality. nn nnDifferent strategies have different approach when it comes to commercial real estate investing. Having sufficient knowledge in commercial real estate investment, deciding on what property type you want to invest in, and determining your risk vs. return tolerance, are key factors in creating a diversified portfolio and becoming a successful investor in the real estate industry.nn nn
nnEven after outlining all the information above, investing in CRE can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.nn nnNeed help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!nnn nnPhill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns. nn nnBookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCREnn
by Prince Licaylicay | Jun 16, 2021 | All Articles, Investing
For sure, all of us are dreaming to have an investment that generates income, producing a steady cash flow while appreciating its value over time, right? As long as it was executed well and with due diligence, it can potentially give us big returns in the long run, and that includes Real Estate Investment.
Any type of property, may it be residential or commercial, can be a good investment opportunity. Moreover, this article will focus on commercial real estate investment and the strategies you could use in order for you to create a diversified portfolio in the commercial real estate business.
Now, the question in your mind would be, ‘Why commercial real estate and not residential real estate?’ ‘What are the advantages and benefits I could get from it?’ Let me go ahead and give you some key takeaways that could help you decide to go for commercial real estate Investment.
- High Income Potential. Investing in commercial real estate over residential gives you higher income potential. Typically, the annual return of commercial properties depending on a lot of factors ranges between 6% and 12% compared to residential that is only 1 to 4%. That’s thrice you’re getting!
- Triple Net Leases. A brief explanation would be, you as the property owner will only have to pay for the mortgage. All other property expenses, including real estate taxes will be handled by the lessee. In short, you get to enjoy the benefit of having the lowest maintenance income producers for your money.
- Stable and Safe. We can’t deny that there are risks imposed in every business purchase. However, investing in commercial real estate business among other investments is a safer option. Stocks and bonds are liquid assets and ever-fluctuating in the market, while the tangibility of assets in the form of commercial property demonstrates stability making it a safer option.
These are just a few of the many reasons why investing in commercial real estate is a good decision that could potentially reap big rewards over time.
While it sounds tempting to get involved in the commercial real estate business right away, “investment”, in general, is not guaranteed to have big returns. Any investor understands that there are risks involved that could lead to big losses of money, and any successful investor did not achieve a diversified portfolio overnight. It takes time to learn the basics and fundamentals in the real estate industry. Having said that, investors practice, practice, and practice until they’re good in this type of field. Here are some tips to become the next successful real estate investor:
1. Educating yourself on commercial real estate investment by:
- reading commercial real estate books and articles
- getting the latest updates online about the commercial real estate industry
- watching videos on YouTube
- having conversations with other investors to gain more knowledge
- joining real estate investing groups
2. Choose your property type before finding an investment strategy is a good approach to CRE investing
Commercial properties are classified into 5 major categories:
- Multi-family (multi-residential or
apartment buildings)
- Retail (malls, strip plazas, grocery stores)
- Industrial (warehouses, pharmaceutical
facilities)
- Hospitality (hotels, medical centres)
3. Determine your risk vs. reward tolerance
- This is the part where you gauge yourself on how far are you willing to go in buying that commercial property. At the end of the day, the bigger the risk, the bigger the reward.
4 Strategies in Commercial Real Estate Investing
Over the past years, investors have been using different types of strategies in purchasing a commercial property. Since there are a lot of factors to consider in a CRE investment, investors want to make sure that they are putting their time, effort, and money into something that could grow in the near future. These are the 4 major strategies in commercial real estate investment:
- Core Assets
The most conservative, consistent, and “safest” among all. These assets are class-A, institutional, usually super-well-located buildings that are occupied by very high-credit tenants. This is a strategy where investors value dividends in their portfolios. Since core assets have a low-risk profile, hence the returns are also small, usually from 6% to 8%.
- Core-plus
This is quite similar to core but with a little bit of risk involved and is the least common among the four. This type of real estate is fundamentally strong, stabilized, but can still be improved to enhance returns. Since there’s the element of risk, such as lease expirations and age of the building resulting to mild renovations, core-plus assets generate leveraged returns ranging from 9% to 12%, depending on a variety of factors.
- Value-added Assets
These investments include properties that have larger renovation or operational improvement to add necessary value that could ultimately drive enhanced returns. An example would be an apartment building built in the 90’s with units in original condition that require a major interior renovation.
Since there’s a significant risk in this type of investment, it also has significant upside if things go well as planned and the returns will be higher on the deal, typically ranging from 13% to 16%.
- Opportunistic
The most risky investment strategy in commercial real estate investing. These are distressed buildings that require a lot of renovation and have a high vacancy rate. Opportunistic investment includes ground-up development and purchases of land.
This strategy entails a greater level of risk but has the potential for the most return as well. These assets, when executed properly, can generate 15%+ internal rate of return (IRR).
Commercial real estate properties are assets that can generate money through rental income or appreciation of its value over time. There are 5 major categories in commercial real estate: multi-family, office space, retail, industrial, and hospitality.
Different strategies have different approach when it comes to commercial real estate investing. Having sufficient knowledge in commercial real estate investment, deciding on what property type you want to invest in, and determining your risk vs. return tolerance, are key factors in creating a diversified portfolio and becoming a successful investor in the real estate industry.
Even after outlining all the information above, investing in CRE can still seem daunting. That’s why the Leveraged CRE Investment Team at Commercial Properties, Inc. is here to help you achieve your investment goals. Contact us at (480) 330-8897 or send us an email at request@leveragedcre.com.
Need help on how to get started investing in commercial real estate? We got you covered! We prepared a free e-book that will serve as your guide to achieve your long-term business goals or obtain that property you’ve always been dreaming of!
Phill Tomlinson is a commercial real estate broker with Commercial Properties, Inc. (CPI) in Scottsdale, Arizona, and owner of the Leveraged CRE Investment Team specializing in investment sales and tenant/landlord representation in the Phoenix and Scottsdale submarkets. Phill applies over 21 years of experience in the Real Estate industry helping investors and owners maximize their returns.
Bookmark www.leveragedcre.com to learn more about the Commercial Real Estate market and keep informed of relevant real estate strategies designed to maximize your income property investment results. Connect and follow Phill on Social Media at sm.leveragedcre.com/smplatform. #LeveragedCRE
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