Investing in commercial real estate not only offers unique opportunities for portfolio diversification and risk mitigation but can also present a wide range of both short- and long-term financial growth opportunities for investors. However, before entering into a private placement real estate venture, it is vital to conduct thorough research to assess a project’s potential for future growth.
When assessing commercial real estate investments, investors should use all data at their disposal to help highlight properties which warrant further investigation. These metrics can not only save time, but are extremely useful in extracting essential information to make informed decisions and hone in on potentially lucrative financial growth opportunities.
Two Widely Used Real Estate Assessment Metrics
Although there are countless ways to evaluate a property’s overall value, many investors begin by examining two important factors, the price per unit and the income relative to price.
- Price per Unit: One of the most popular methods of assessing the value of a commercial real estate venture is the price per unit. This straightforward metric gives potential investors a fast and reliable way to determine if a property warrants further evaluation. To use price per unit, simply divide the asking price of the property by either the total number of units it contains, the square footage of each unit in the property or, in the case of a hotel, the number of keys it includes.
- Example: A 20-unit property having 500 square foot units has an asking price of $500,000. This property is assessed at $50 per square foot or $25,000 per unit. In the case of a 50-unit luxury hotel with a $1 million asking price, each unit, or key, would be $20,000.
Despite the ability to quickly assess each unit’s price, this method has limitations. Since it represents only a rough estimate of value, it does not take into account other important variables about a property such as:
- Location
- Features and amenities of each unit
- Income generated from each unit and more
Therefore, the price per unit alone is often not sufficient to determine the overall potential of a real estate investment. To gain greater insight, investors should use it in conjunction with another metric such as income relative to price.
- Income Relative to Price: This metric weighs the annual income a property generates as compared to its asking price.
- Example: A commercial property which generates $50,000 in income each year from rent or other revenue streams and has an asking price of $500,000 would have a 10% yield. Real estate investors use this estimated yield to help determine an investment’s feasibility and potential for revenue generation.
When weighing the potential of investing in a property which is currently vacant, similar properties in the area can be used to estimate the income or rent the property would generate.
Want to Learn More About Private Placement Real Estate Investing?
Although there is ample opportunity in today’s commercial real estate market to experience growth, it pays to have an experienced team by your side before making decisions which could affect your portfolio. At Realty Capital Partners (RCP), our knowledgeable staff stands ready to assist clients by delivering in-depth market insight backed by extensive expertise in this arena.
If you would like to learn more about the benefits of private placement real estate investing or if you have a question about additional metrics used to evaluate investment properties, connect with our team by calling (469) 533-4000. Please also feel free to reach out to us with your questions via email at rcp@rcpinvestments.com.
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