Brokerage Archives - Page 2 of 2 - Kelley Commercial Partners

If you’re considering investing in commercial real estate, you’ve probably heard the term “cap rate” thrown around. Cap rates, short for capitalization rates, are a key metric used in commercial real estate to determine the value of a property and its potential return on investment. It’s essential to understand what cap rates are, how they are calculated, and how they affect the value of a property before you buy.

WHAT ARE CAP RATES?

Cap rates are used to determine the value of a property by calculating the net operating income (NOI) divided by the property’s market value. The NOI is the income generated by the property after all operating expenses have been deducted but before debt service and taxes. Cap rates are expressed as a percentage, with a higher percentage indicating a higher rate of return.

HOW ARE CAP RATES CALCULATED?

Cap rates are calculated by dividing the NOI by the market value of the property. For example, if a property generates $100,000 in NOI and is valued at $1 million, the cap rate would be 10% ($100,000 divided by $1 million). Cap rates can also be used to estimate the value of a property by multiplying the NOI by the cap rate. Using the same example above, if an investor is looking for a 12% return on investment, they would be willing to pay $833,333 ($100,000 divided by 12%) for the property.

HOW DO CAP RATES AFFECT THE VALUE OF A PROPERTY?

Cap rates play a crucial role in determining the value of a property. A higher cap rate means that investors are willing to pay less for the property, which can be an indication of higher risk, lower cash flow, or both. Conversely, a lower cap rate means that investors are willing to pay more for the property, which can be an indication of lower risk, higher cash flow, or both. Cap rates can also be used to compare the value of similar properties in the same market. For example, if two properties generate the same NOI but have different market values, the property with the lower market value and higher cap rate may be a better investment opportunity.

WHAT FACTORS AFFECT CAP RATES?

Several factors can affect cap rates, including the property’s location, condition, tenant mix, lease terms, and market conditions. Properties located in high-demand areas with strong economic growth and low vacancy rates typically have lower cap rates. Properties with long-term leases to creditworthy tenants and low operating expenses may also have lower cap rates. Conversely, properties located in areas with weaker economic growth, higher vacancy rates, and higher operating expenses may have higher cap rates.

HOW TO USE CAP RATES IN COMMERCIAL REAL ESTATE INVESTING

Cap rates can be a useful tool for investors looking to get involved in commercial real estate. By understanding cap rates and the factors that affect them, investors can make informed decisions about which properties to invest in and at what price. Here are some actionable tips for using cap rates in commercial real estate investing:

Research the market: Before investing in a property, research the local market to understand the demand for commercial real estate in the area, vacancy rates, and economic growth.
Evaluate the property: Evaluate the property’s condition, tenant mix, lease terms, and operating expenses to determine its NOI and market value.
Compare cap rates: Compare the property’s cap rate to similar properties in the same market to determine if it is a good investment opportunity.
Consider the risks: Consider the risks associated with the property, such as changes in market conditions, tenant turnover, and maintenance costs.

Our team of trusted commercial real estate professionals has the knowledge and experience in the local market to guide you through all the above and provide valuable insights into the investment potential of a property. For more information, please contact us.

Daryl Peeples
President | Principal Broker | Partner

Daryl joined the firm in 1985 and currently serves as president and principal broker, and partner. As principal broker, he ensures that all business conducted by the firm and its real estate activities adhere to the rules and regulations set by the Arkansas Real Estate Commission. Daryl provides strategic direction and leadership to advance the company’s mission and increase revenue, profitability, and growth as an organization.

Kelley Commercial Partners has an award-winning team of real estate professionals with the experience and knowledge to ensure you maximize your potential and reach your financial goals. Let us help you create a clear plan and provide the guidance you need to confidently move forward. Contact us today or click the links below to explore investment opportunities in Central Arkansas.

The Shoppes at Colonel Glenn

Dollar General in Rose Bud, AR

By Bill Puddephatt, CCIM

Investing in the CRE-Office sector can offer an excellent opportunity to diversify one’s investment portfolio. A CRE office property is a hard, tangible asset which has historically performed well over time. When the opportunity presents itself and if the time is right for you, it is wise to engage the services of an experienced CRE agent who can help evaluate and develop an investment strategy that is suited specifically for your needs and goals. It is also advisable to engage your CPA and attorney for their expertise at some point in time as well.

There are two types of investors: owner/users who intend to occupy the purchased property and those who strategically invest for the income stream and future appreciation value.

OWNERS/USERS

If you are an owner/user, you have better control over occupancy costs as you can manage levelized mortgage loan payments and have more control over operating costs such as real estate taxes, building insurance costs, property management fees, and grounds and building maintenance expenses. This provides an advantage tenants cannot have as they are often subject to annual rent increases, escalating operating costs, and a fair rate of return added for the landlord.

INCOME-GENERATING INVESTORS

Others chose to invest in CRE office property assets as an alternative way to diversify their portfolio while at the same time building a steady reliable cash flow. This type of investment also provides tax-favored treatment such as depreciation and capital gains treatment when you sell. You may also defer your gains via a 1031 tax-deferred exchange by rolling your gains into a like-kind property when you sell. The 1031 tax-deferred exchange has specific rules which one’s CPA can assist in analyzing for you. Read more about 1031 Exchanges by clicking here.

Both scenarios are considered excellent diversification strategies that may allow investors to achieve an attractive rate of return that can continue to grow over time, as well as the opportunity to sell and realize a gain resulting in a more favorable capital gains tax rate treatment than that of an ordinary income tax rate. And one doesn’t need to start with a large investment. You may decide to invest as a sole owner of a small property or as a partner/member of a larger entity. The latter provides the advantage of spreading out your risks, as a larger property likely has more tenants, which means if a tenant vacates a space, it is less impactful than losing a tenant in a smaller building with a single or very few tenants.

And last but certainly not least, investing in the CRE office sector provides another incalculable benefit: the pride of ownership!

As with any investment opportunity, risks are involved. This is why it is important to work with a professional commercial real estate broker who understands the market and can help you identify and carefully evaluate any potential investment opportunity to ensure that it aligns with your goals and risk tolerance. With the right approach, investing in office buildings can be a great way to build long-term wealth and generate passive income.

Bill Puddephatt, CCIM

Bill Puddephatt, a distinguished veteran of the Central Arkansas banking industry, made a seamless transition into the real estate brokerage field with Kelley Commercial Partners. With a remarkable career that included originating over $1 billion in loans without a single loss, Bill’s expertise in financing encompasses a wide range of real estate ventures, from office buildings to multi-family projects, hotels to subdivision developments. Renowned as a trusted advisor, he offers clients tailored solutions in the ever-changing realm of real estate.

Kelley Commercial Partners has an award-winning team of real estate professionals with the experience and knowledge to ensure you maximize your potential and reach your financial goals. Let us help you create a clear plan and provide the guidance you need to confidently move forward. Contact us today or click the links below to learn about current office property investment opportunities in Central Arkansas.