Commercial Property Income

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Commercial Property Income

When investing in commercial property comes the sole driver for most to actually go and look at it in the first place. High yields, high income and that to over long leases at times. When you’re looking at commercial property what does that break down to income and what are the things to consider on how that cash flow is made.

Number one is the net yield. So this is basically the percentage return you’re going to get after all the expenses have been taken into account. For some cases it’s the tenant paying a lot of the expenses and the net yield is what they transfer you afterwards. In other cases they transfer your very high gross yield and the net yield is then covered by all the expenses that you’ve paid. So when looking at that – that’s component one for commercial property income. Component number two is rent rises.Rent Rises are very common in commercial property because as time is going on inflation is also impacting and devaluing the money and from that place what’s happening there is that with the rent rises – they are to keep up with this change to ensure that you’re getting a similar or greater return as time is going on. So rent rise number one might be CPI or rent rise number 2 might be a percentage annually decided upon by the landlord and the tenant. Now what’s important to consider is some percentages can be quite significant. I’ve seen percentages up to four and five percent on rent rises and then you’ve seen your CPI, which is hovering around between 1.5 to 2.1 depending on which time you were looking at it.

Now in that aspect when you’re thinking of rent rises why that’s so important to a commercial property investor is that has a very strong correlation to your value. So when you think of buying in you might buy in it’s yield, but then you look at the the net yield years later, which you can actually quite predictably map out and see what that becomes. Now there are some traps that you need to consider in the space of commercial property income that can impact investors as well. One trap is Commercial Property Incentives.

It’s a very common thing where landlords have gone ”Hey tenant. I’m going to give you one year rent free as part of the sign up, but then it’s going to be a eight percent net yield or X dollar amount and you’re going to cover these up goings”. And if they go and sell that property sometimes people can look at the yield and the numbers and be very very happy with the numbers there. But without realizing that inside the least there was a less incentive given. Now if that incentives given once by the tenant do you think that they expect or wish to get the lease again in terms of the incentive? You guessed it. They’re probably going to get it again or they’re going to request it because there might not be paying market rent. They might be paying inflated rent. So when looking at commercial property income, yes, it can be enticing with these numbers but, A – you have to look at the lease incentives. B – you do want to map out your predictable income rises or what estimately might be because then you can start to map out how your values might look on the worst case and C – the net yield does can be considered from the tenant paying the expenses as well as all of you paying expenses.

One thing that’s really important to consider as well is Property Management. Many are under the belief that the net yield includes Property Management, in most cases it doesn’t. Which means you need to cover that off from the net yield to get a new net yield. So it’s gross yield, net yield, net yield in post property management.

That’s it from us here at InvestorKit, Experts in Wealth Creation – helping you take action.