Creating Gold with Commercial Real Estate Investing

We love commercial real estate, especially multi-family properties like Apartment Complexes, Mobile Home Parks, and Self-Storage facilities.  Why? Because we are creating gold with commercial real estate investing.   To understand why, you need to understand how commercial real estate is valued.

Whereas residential house values are highly driven by similar properties in close proximity to the house, the neighboring properties, and the neighborhood, commercial properties not so much.  In fact, commercial properties are largely driven by what is called “Net Operating Income (NOI).”

NOI is defined as Gross Actual Revenue (the amount of money coming in) minus normal operating expenses.  Normal operating expenses for the purposes of calculating NOI do not include things like principle and interest loan payments, capital expenditures, depreciation, income taxes, and amortization of loan points.

So any time you can increase revenue more than the associated costs of that increased revenue you will increase NOI.

This is why we love Apartment Complexes, Mobile Home Parks, and Self-Storage facilities.  These three classes of commercial real estate have one thing in common….renters.  Renters expect their rents to rise over time, usually once a year.  If the additional revenue generated by the rent raises is greater than any additional operational costs, then you increase profit, and therefore the value of the property!

There are certainly other ways to increase profits through “Value Adds.”  Suppose you have an apartment complex and you add a laundry facility to it or establish a charge for pets.  These new charges would generate additional revenue.  The laundry facility would have additional costs associated with it such as water, electricity, maintenance, etc. But a pet charge probably wouldn’t have any additional costs.  In either case, if the additional revenue exceeds the additional costs, you have increased the value of the property.

This is great way to build wealth, it takes work, but where else can you create gold that pays you over and over again.

Look for my next blog and I will explain how cap rates can magnify each new dollar in NOI you create to really push the value of your commercial property higher.

Twitter Digg Delicious Stumbleupon Technorati Facebook Email

No comments yet... Be the first to leave a reply!