Commercial Real Estate – Things You Need to know

Commercial Real Estate - Things You Need to know

What is Commercial Real Estate?

Real Estate is a general term that refers to every kind of property that might be residential, industrial, agricultural, or commercial. But, when you suffix “Commercial” to it, then it specifically deals with a particular type of real estate. Commercial real estate here means that the property is rented out to one or multiple tenants against a reasonable rent and some down payment if any.

Primarily, commercial real estate refers to the real estate business in which a property is either owned or leased out to tenants and regular income is generated on monthly basis in the form of rent with an annual increase as per applicable laws. Commercial real estate may include but is not limited to commercial office buildings, big shopping malls, factory buildings normally located inside industrial zones, farming lands, etc.

Well, before you get started with your search for commercial real estate listings, it is very much important for you to know certain parameters that determine the property worth of that commercial real estate. In this article, we are going to discuss the same.

To begin with, there are lots of tools that can help you find the most recently posted commercial real estate listings. For example, there are websites where you can find commercial real estate listings/properties that can get you connected with the owners of the properties directly. Another alternate way is to search “entry only” commercial real estate listings that are offered by so many platforms that you can easily search online.

The 50% Rule In The Commercial Real Estate:

Before you make up your mind to buy commercial real estate, it is extremely important for you to know this market rule which is likely to help you a lot if you are in the commercial real estate business. According to the 50% Rule, commercial real estate business persons should be aware of the fact that the running expenses of a commercial real estate should be around 50% of the total income of that commercial property. Here let it be pointed out that the aggregate doesn’t include the dues such as mortgage payments if any. However, it does include other necessary expenses such as

  1. Commercial property tax
  2. Commercial real estate insurance
  3. Commercial real estate repairs
  4. Commercial real estate maintenance/renovation expenses
  5. All the utility expenses payable by the owner of the property

This rule is a great parameter to determine the commercial real estate valuation.

Cap Rate For Commercial Properties:

Cap Rate or Capitalization Rate is a unique real estate formula that is more often used while dealing with Commercial real estate matters while to make an estimated return on the returns of commercial property for the owner. Normally, it is expressed in percentage and it ranges between 3% to 20%. Usually, the cap rates are inversely related to the value of the commercial property.

A Good Cap Rate:

Whenever an investor buys commercial real estate, he intends to generate some profit out of that deal. So, it is very much necessary for the investor to get to know in advance if the commercial property carries the worth to generate the anticipated profit.

As a matter of fact, we can’t say nor can any rule give you a blind conclusion if no comparison is carried out before any investment. So, the best thing to reap maximum return on commercial real estate, it is advised that the investor should consider the commercial real estate opportunities, compare their costs in addition to the current economic situation of the country, and then decide accordingly. So, a comparison of commercial properties will give the investor a better cap rate (capitalization rate) to reap the maximum return from the investment.