How to predict the profitability of commercial real estate?
The correct choice of commercial real estate (trade pavilions, MAF, offices, warehouses, etc.) when buying and renting directly affects the level of income from it. However, unlike tenants, entrepreneurs who make the decision to buy premises take a much greater risk. Nevertheless, this type of investment stably remains one of the most common, since with a competent approach it can provide stable profits.
One of the most important steps is to calculate the profitability of a commercial space in order to choose the best option for a purchase. The simplest method is to calculate using the following formula: profitability = 1-year net profit / acquisition cost. The calculation of the annual profit requires special care; it is necessary to take into account all possible unforeseen expenses, risks of downtime and a decrease in the rental rate.
When calculating net profit, the total amount of gross income is taken (in this case, the rental payments specified in the contract), from which losses and operating expenses are subtracted. Losses are income lost due to downtime or lower rental payments. The size of the rental rate can be influenced by the location of the object (in a busy central area, the fee will be higher than in the outskirts) and even the season. Operating expenses are fixed and variable costs.
Variable costs (electricity, heating, water supply, cleaning, etc.) are usually paid by the tenant. Fixed costs paid by the landlord include the following items: maintenance of the premises; major overhaul; taxes or rent for a land plot; property ownership tax and more. This option for distributing payments is the most common, however, the parties can agree among themselves otherwise and indicate each of the points in the agreement. It should also be noted that the above method for calculating the profitability of a premises is best used only for commercial real estate that will not need large-scale financial investments during the payback period.