Essentials in Evaluating Commercial Real Estate

by | Apr 30, 2017 | blog

STUDIES IN FINANCIAL MEASURE:

For fun and educational purposes let us analyze an office building in Seattle.

Depending upon your investment strategy you may be looking to diversify your portfolio with commercial real estate. A great way to mitigate potential risk is to acquire properties with stabilized rents and property management.  The financial measure report below provides breakdown evaluation and acquisition approach of such property.

This is an actual real estate investment analysis rich with vital insights.

This report displays a variety of financial measures an investor would use to determine a worthy acquisition.

Notice the Cap Rate is 6.46%. This report chose to use capitalization rate as a common financial measure.

Lets talk about Cap Rates and why it is often misunderstood. Do you agree Cap Rates is the best financial measure to use? Please share why or why not in the comments.

Cap Rates in Commercial Real Estate

LEARN ABOUT CAPITALIZATION RATES

 

Notice the Internal Rate of Return (IRR) with financing and without.

Lets talk about what factors comprise the IRR and how it differs from the Cap Rate as a financial measure.

Notice how the Loan To Value (LTV) effects the debt coverage ratio.

In the commercial world, 25% LTV is used by many lenders to achieve an acceptable debt coverage ratio.

These factors amount to a sensitivity analysis which helps us figure out the sales price.

Let stay ahead of the game in commercial real estate by reviewing your input values and running the numbers.  

There are quite a few financial measures used in the value and performance of investment properties.

Some common Financial Measures are Gross Income Multiplier, Return on Equity, Debt Coverage Ratio, Loan to Value Ration, Operating Expense Ratio, Default Ratio, Long Term Discount Cash Flows.

Which financial measure an investor chooses to determine value is predicated upon the investors strategy.

Do you have any tips for evaluating commercial real estate please share in the comments!

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