ROI on Commercial Property
In commercial real estate, the acronym ROI carries an immense amount of weight when held against an investment property.
In the world of commercial real estate, your “return on investment,” is a key piece of data that not only helps you compare the performance of your investment property to others, it also can be used in the management of your investment in a myriad of ways.
What is ROI?
Your ROI is your calculated return on investment – how much profit or loss your investment property has produced versus the total sum of money you have invested in the property. By comparing the percentage ROI of your property, you can see how your commercial real estate property compares to others.
In order to calculate this ratio, simply calculate your net profit on the commercial property and divided it by the cost of your investment. Multiply it by 100 and you will get the percentage return on investment.
There are some limitations to your ROI calculations – the main complication being compounding interest over time. This is why it is also important to additionally calculate your annualized ROI each year.
Use this formula to calculate annualized ROI, where the value of ‘n’ is the number of years you have held the investment:
{[1 + (Net Profit / Cost of Investment)] (1/n) – 1} x 100
While ROI cannot be the only calculation your depend on when assessing your investment property, it is an important calculation to file away.
What ROI to Expect on a Commercial Property
Most sources will tell you that a “good” ROI is approximately 7% and up, according to Forbes.
That 7% is just a snapshot of what you can expect over the long term – an average overtime as your ROI naturally fluctuates. Some years the market may be kind and it will bump up higher. Other years you could see a dip.
An ever changing economy and market can alter the frame of your ROI, as well as the specific qualities of your investment. For example, changes in the economy resulting from the coronavirus pandemic have significantly altered the performance of office properties.
According to a recent report from Statista, the overall market for office space has been hit hard with an approximately 15% office vacancy rate in the United States. Office has traditionally one of the largest segments of commercial real estate, but changes amidst the pandemic have shifted focus to industrial properties.
In 2021, Statista’s data shows that the value of construction starts of warehouses was over $26 billion in the United States, compared to approximately $19 billion for office properties.
That being said, the success of a commercial office space property in the state of Alabama cannot be measured by the national average. A building in the booming Huntsville area or a renovated historic building in downtown Birmingham has the potential to generate a great ROI in comparison to the national average.
How do you utilize ROI?
Your ROI can be utilized in the management of your investment property as well as the evaluation of your portfolio.
This data can be a great help when it comes to putting more money into your investment property over time.
Say you decide to invest in marketing your commercial property, you can compare your ROI prior to advertising to your ROI afterwards and calculate how effective the strategy was.
Additionally, consulting the ROI data of similar properties in your area can help you build a strategy for increasing your own ROI. If you decide to make upgrades to your property, you can assess the effectiveness of other similar projects.
Ready to Invest in Commercial Property?
When it comes to investing in commercial property, your ROI can tell you a lot about the value your investment has brought to your portfolio. That being said, ROI isn’t a holy grail piece of data.
Even a property that seems like a “sure thing” can be mismanaged or just turn out to be a dud. That’s why it is always important to consult professionals when it comes to protecting your investment.
If you’re looking to invest in commercial property in Alabama, Ironvest is here to help guide you.
