Office Investment Tips
Posted: June 2nd, 2006
Category: real estate news
As with any investment, office investment requires the investor to calculate the expected return of profits after expenses. Unlike residential, commercial real estate seems confusing by the different terminology. However, it is the same basic principals.
Terms that are useful to understand and calculate for effective commercial real estate analysis:
Gross Operating Income (GOI)
Net Operating Income (NOI)
Annual Debt Service (ADS)
Cash Flow (CF)
Capitalization Rate (CAP Rate)
Gross Operating Income is calculated by assuming the Potential Rental Income (expected monthly rental income x 12) for the property and subtracting an expected Vacancy percentage. You then take the GOI and subtract all operating expenses (property taxes, property insurance, utility costs, management fees, expected repairs budget, advertising costs, etc..) to create a Net Operating Income. Annual Debt Service (monthly mortgage payment x 12) is then subtracted from the NOI to calculate the Cash Flow of the property.
Cash Flow on the property is the profit or loss per year before taxes (these tips always assume before tax cash flow as taxes are based on the individual investor’s income bracket). The results of a Cash Flow analysis is usually enough to determine whether the property is an attractive investment or not, however, beauty is in the eye of the beholder.
Capitalization Rate is an effective way to compare one investment to another and is calculated by dividing the Net Operating Income by the Value (or price required to pay) of the property.
Helpful formulas for office real estate analysis:
GOI = PRI – Vacancy Rate
PRI = expected monthly rental income x 12
NOI = GOI – Operating Expenses (taxes, insurance, management, repairs, etc..)
ADS = monthly mortgage payment x 12
Cash Flow = NOI – ADS
CAP Rate = NOI ¸ Value (or price)
Sample Case Study for an Office Condo Investment
Sales Price $236,000
Square Footage 1988 SF
PRI $25,844
GOI $23,260 ($13/SF assuming 10% Vacancy)
NOI $16,065
Expense Breakdown: $1.15/SF Taxes, $0.50/SF Repair Contingency, and $1.15/SF CAM Fee includes Water, Sewer, Garbage, Insurance
ADS $4,066 (Only a $36,000 loan and a $200,000 down payment)
Cash Flow $11,999
CAP Rate 6.8%
You can download a more detailed analysis spreadsheet showing this example by clicking here.
Also, check out these sites for other tips and tools for real estate investment:
Georgia Real Estate Investors Association
Rent Income - Free Real Estate Investment Analysis Tool
Investor Dictionary
National Real Estate Investor Magazine
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