The value of commercial real estate has been going up fast in the country owing to rapid development that has been seen in the country in the recent years. This has caused many investors to come forward and invest in the commercial real estate market of the country. The returns from investment have been fairly good in these recent years. Here are a few numbers you must know if you are contemplating investment in any commercial property:
You are reading: 5 Numbers to Know For Evaluating Commercial Real Estate Investment
1 Down Payment Requirements: An investment in any commercial property entails huge investment and usually a loan is sought for purchasing a property. While a large of part for the value of the property will be paid off by the lender, which can be a bank or NBFC, you will have to make down payment for the property. The down-payment is usually 30 percent or above of the value of the property. In case of home loans, the lender may be willing to lend even 90 percent of the value of the property, but in case of commercial deals, the lender will ask you to take care of 30-40 percent of the value of the property depending on other parameters of your profile.
2 Rental Income To Qualify: If you have a commercial property and you are deriving rent from tenants in that property and want to purchase another property on the back of the existing property, that is, you want to show your rental income as your EMI paying capability then you must have at least 2 years of history to manage the existing property. You will also have to purchase rent loss insurance policy for at least six months for the existing property .
3 Price To Rent Ratio: This is an important ratio to consider before investing. The price-to-rent ratio is derived at by dividing the mean property prices in a particular market or sub-market by the median annual rent. This number will give you an idea as how much you will be able to make from the property. A market which has high price-to-rent ratio is generally not considered very good for investment purpose and investment in that particular market or sub-market can be avoided.
4 Gross Rental Yield: If you are buying a commercial property for earning rental income, the property must be able to give you a decent rental yield. The gross rental yield can be found out by dividing the projected annual rent by the total property cost and then multiplying it by 100. The rental yield must be able to cover the mortgage payout and still spare something for you.
5 Capitalisation Rate: This rate is better than gross rental yields in some ways as this gives a more holistic view. This is calculated by taking the projected annual rent and subtracting the projected annual expenses, then dividing the figure by total property cost and then multiplying the resulting figure with 100. The total rental property expenses will include repair costs, taxes, vacancy costs, landlord insurance and broker fees.
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