How to Calculate Return on a Commercial Real Estate Investment

Now that the Real Estate Market is recovering, maybe it is time to invest in commercial real estate? If someone does, how do they know if they are making a reasonable rate of return on their investment. The following are 2 basic ways to calculate the return. 

1: Cash on Cash Return

How much money is needed to be invested in a property now to generate return at the end of the first or following years?

---

If a minimum of $50,000 is invested in a commercial property and at the end of the year after servicing the debt (principle and interest) and all other expenses $5,000 is returned. $5,000 divided $50,000 is 10%. This is the cash on cash return. Investors use this method to gauge how an investment is performing on a year by year basis.

2: Capitalization or simply “Cap Rate”

This is calculation used in the real estate market to compare different commercial real estate investments. Subtract the total expenses from the gross income to get the net operating income. Divide the net income by the capital cost (the price paid for the property or the market value) and this gives the “Cap Rate”. This is the most commonly used calculation used in the commercial real estate industry and will give a “snapshot” on the financial health of the investment.

Knowing these two basic terms helps potential commercial real estate investors communicate with companies that provide professional commercial real estate services. One such company is First Fidelity Realty DeSimone in Henderson, Nevada. First Fidelity Realty DeSimone specializes in sales, leasing and development acting as principals and brokers. Anyone who is interested in investing in the lucrative Vegas Valley Commercial Real Estate Market should contact Joe DeSimone at 702 990 8660.