Do the math! The complex formulas involved in commercial real estate go far beyond basic arithmetic
By Brenda Bray
So, you think you want to pursue listing, leasing, or selling commercial real estate. Experienced investors who crunch numbers like computers in their heads can create heart-stopping moments for agents new to commercial real estate. Creating a comprehensive investment analysis for a commercial investor may be a deciding factor in whether you elect to learn it — or refer it and collect a nice referral fee.
Cynthia Shelton, noted commercial broker and Certified Commercial Investment Member (CCIM) instructor, shared an overview of Commercial Real Estate by the Numbers with residential agents at the Orlando Regional Commercial Council’s May networking event. The following summarizes steps and approaches Shelton presented to prepare a financial analysis for commercial investment decision making. The object is to bring awareness to the expertise involved and encourage those interested in commercial real estate to seek further education. Or, refer commercial opportunities outside your area of expertise to a qualified expert.
Step 1 Calculate Initial Investment
To begin, determine investor’s initial investment in the asset. Purchase Price + Acquisition Costs + Loan Costs – Mortgage = Initial Investment
Step 2 Determine Annual Cash Flows Before Tax (CFBT)
The cash flow model addresses how many, and when, dollars go into an investment as well as how many, and when, they come out over the time period the investment is held (i.e. number of years).
Select the appropriate approach(es) for measuring investment performance
Let’s review some uses and characteristics of performance measures.
Gross Rent Multiplier (GRM) factors the multiplier of potential rent income that the investor pays as a purchase price. GRM = Purchase Price/One Year Potential Rent Income
Relatively easy to obtain needed information.
Covers only one holding year.
Quick estimator for multi-family.
Capitalization Rate is like using a compass to find direction. Simplified, it is the favored approach to comparing first year returns.
Considers vacancy, credit losses, other income, and operating expenses.
Doesn’t consider mortgage financing and rent increases.