Commercial Real Estate Strategies: The “columbo” Questions
Article by Tony Seruga, Yolanda Seruga And Yolanda Bishop
For the astute commercial real estate investor, the cap rate [AKA Capitalization Rate] is an important financial number to consider. Here’s why:
Commercial Real Estate Earns Income
One main identifier that defines commercial real estate from other types of real estate is that it earns income for its owner. Commercial real estate values are typically based on these current (and/or future) income streams from the property under evaluation.
While there are many types of commercial real estate, such as strip malls, office buildings, condo projects, industrial sites, and several other property types, each is supposed to produce net income.
Each of these commercial real estate properties will normally have an income stream and associated expenses. It doesn’t matter if it is a mall, hotel or a trailer park. All commercial real estate properties typically have both income coming in and expenses going out.
The Raw Land Exception
The one exception to this typical ‘rule of thumb’ is raw land. Raw land will many times not have any income stream, so it has to be evaluated differently for commercial purposes
Evaluating the Cap Rate
When a commercial real estate property is evaluated, the buyer does his or her best to ascertain the accurate and sustainable income stream the property is currently producing. The cap rate is based upon current financial numbers, not future. And if it is not being used to its highest… Read the rest
