When the economy is going great, commercial property investors could buy almost anything and still come out ahead. Until just a couple of years ago, if you were to buy a commercial property, you could increase rent prices almost yearly. Yet, even when commercial real estate opportunities involved buyer mistakes, the property’s appreciation alone made the investment a success, right?In that kind of economy, even underperforming commercial properties made money simply because the property would steadily and significantly appreciate in value.
Now though, commercial real estate investors must be careful not to over pay and not to allow the property to underperform. Investors who aren’t savvy can end up being forced to sell, sometimes at an unsatisfactory price. The loss of the asset can be difficult. Smart investors make choices ahead of recessions that focus on cash flow without depending on the property’s appreciation.
Calculating Cash Flow
Let’s say that an investor purchases commercial property which stays occupied all of the time. In The Florida Keys area, renting out commercial property is easier than in other areas of the country, because the Keys has a strong tourism sector. Just for prudence though, it’s safest to assume a six percent vacancy risk. This will help you anticipate cash flow.
Pretend that each units of four an investor leases out has a monthly rent of $1,000 for the sake of easier math. Then, pretend your monthly payments including taxes and insurance equal $2,000 per month. Let’s say you learned from the previous owner that there was an average repair and maintenance cost of $3,000 per year and $400 per year in advertising and miscellaneous costs.
Here is one, easy way to estimate cash flow:
- Determine gross rental income: $1,000 x 4 units x 12 months = $48,000/year
- Determine your annual payments for the commercial property: $2,000 x 12 months = $24,000/year
- Calculate a potential 6% loss of rents: $48,000 x 0.06 = $2,880
Then, subtract annual payments, loss of rents, repair costs and advertising costs from the gross income like this:
- $48,000 – $24,000 – $2,880 – $3,000 – $400 = $17,720
So, you can anticipate the annual cash flow for this theoretical commercial property would be $17,720.
Fluidity of Cash Flow
Most commercial property investors know that cash flow is fluid. Consider a commercial investor who owns a property in which three small eateries are established. The property is across the street from an automobile plant. The eateries are frequented the employees at the automobile plant every day. This is an ideal investment opportunity and your cash flow will remain steady, unless the automobile plant closes down and nothing fills the void. The profits of the eateries would dwindle and they would likely either close up shop or move to a busier location, right?
So, investors must keep these kinds of factors in mind. Of course, in the Florida Keys, the strong, enduring tourism market certainly helps investors buy with greater confidence than in many other areas of the country.
RE/MAX Keys Connection
Upscale, Comfortable Commercial Real Estate Office
The RE/MAX Keys Connection office is located in the Historic Heritage House in the heart of Old Town, conveniently located immediately nearby major downtown hotels. Our unique, cafe-style real estate office offers our valued clients a welcoming, upscale, professional environment. Enjoy complimentary beverages, free wi-fi, and a private conference room or expansive front porch, depending on the level of privacy you’re most comfortable with.
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Experienced Commercial Real Estate Brokerage Company
RE/MAX Keys Connection’s owner and broker Curtis Skomp is one of South Florida’s top commercial real estate brokers. With over two decades of experience and a CCIM (Certified Commercial Investment Member) designation, Curtis has brokered commercial real estate including industrial properties, shopping centers, strip malls, trailer parks, bars, restaurants, hotels and multi-unit apartment buildings. Unlike many brokers, Curtis isn’t intimidated by bank foreclosures either.
RE/MAX Keys Connection offers clients international exposure with local service. Our service area includes Key West, Big Pine Key, Marathon, Islamorada, Key Largo, and all of unincorporated Monroe County. Our office is fluent in Spanish, which is highly important when doing business in Southern Florida.
