When trying to assess the viability of a buy-and-hold investment property, what key aspect of its financials should you look at to make your decision? The answer is cash flow.
What determines if you will make sufficient profits from a rental property to channel some of that money into other investments? Once again, the answer is cash flow.
Cash flow is how much money you have every month after you collect all the income from a property and deduct your operating expenses and cash reserves for future emergencies. Cash flow determines the rate you can grow your real estate portfolio, explains Upkeep Media.
While capital growth is important, cash flow is the life of real estate investing. Even when investing for capital growth, there are costs attached to the properties. It would be best if you had income from cash flow properties to cover the cost of your capital growth properties.
Finding a healthy balance between capital growth investments and cash flow properties is vital for short-term profitability and long-term growth. Cash flow properties keep you in business until you can cash in on the value appreciation of your capital growth investments.
Cash flow calculations are vital before you buy an investment property. Even after purchasing the property, it is necessary to keep working to improve cash flow. As an investor in commercial properties, what should you do to boost cash flow from your investment?
How to build a commercial real estate portfolio to maintain cash flow
Firstly, here are the factors that determine the income-generating capabilities of a property. It would be best if you used the following criteria to evaluate any potential commercial real estate investment.
Commercial property in a prime location makes all the difference between phenomenal and mediocre profits. A property in a prime location will fetch higher returns, and loan approval for the investment will be easier.
What makes a good location for commercial real estate? Two things are ease of access and proximity to business hubs, such as retail centers or the central business district.
A commercial property may be in good condition and a great location but still may not be able to yield sufficient income for its owner, often due to the number of such properties already in that location. Demand will be low if there is a surplus of specific types of property. Before investing in the property, check similar properties in the area to see if they have vacancies.
· The financials
If a building is already being used as an investment property, it is easier to assess its performance. You only need to request a copy of its financial history from the current owners. It’s worth paying attention to information such as contractual versus speculative rent, vacancy rates, operating expenditure, capital expenditure, and debt service.
· Rate of value appreciation
The rate of appreciation does not impact cash flow but influences the equity growth rate. A high appreciation rate means you may be able to use the equity in the property as the basis for financing other investments. When looking at the rate of appreciation, check for opportunities for forced appreciation.
Additional factors to look at include:
· The overall property market
Evaluate the condition of the commercial real estate market in the area. Is the market volatile or relatively stable? Looking at the year-on-year analysis for the market will yield a wealth of insights that can guide your decision-making.
After performing your analysis, you’ll want to have information on average rent (calculated per square foot), annual growth in rent, average occupancy rates, projected growth, future commercial property developments in the area, demographic trends, and many more.
· Evaluate industry trends
Unlike residential properties, commercial properties are highly differentiated. Downturns in a given sector do not always indicate a downturn in the overall market. In addition to assessing the condition of the market, it is important to know which industries are currently seeing the most growth or are projected to experience future growth.
For instance, due to the massive growth of online sales and the pandemic, the warehousing industry is currently enjoying high growth. Growth of this sort is often at the expense of brick-and-mortar shops and hospitality venues.
· Identify niches in the market
Commercial real estate markets often have a combination of broad and narrow niches. Properties within a broad niche include office buildings and hospitality venues as they bring in a variety of tenant markets. Alternatively, you have narrow niche markets like agricultural and medical facilities requiring a more specific tenant type.
When deciding what real estate niches to target with your investments, the critical factor is supply and demand. A property in high demand within a market unlikely to become oversaturated in the near future offers the best prospects for maximizing cash flow.
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