Understanding Returns in Commercial Real Estate
Returns from commercial real estate investments typically come from two main sources:
Cash Flow (Rental Income):
- Investors can earn consistent income generated from rents paid by commercial tenants. Properties with stable, high-quality tenants tend to offer reliable, ongoing income.
Appreciation (Capital Gains):
- Profits realized when a property is sold at a higher value than the original purchase price. Factors influencing appreciation include property improvements, effective property management, market demand, and economic conditions.
Important Metrics for Evaluating CRE Investments:
- Internal Rate of Return (IRR): Measures the profitability of an investment, considering both timing and amount of cash flow.
- Equity Multiple: Indicates total returns received from an investment compared to the initial invested amount.
- Hold Period: Duration that the property is held before sale, typically ranging from a few years to over a decade.
Commercial Real Estate as a Long-term Strategy:
- CRE investments are typically long-term and relatively illiquid. However, this illiquidity can be advantageous as it helps investors avoid impulsive market decisions and benefit from long-term appreciation.
- Historically, commercial real estate has offered relative stability during market downturns due to less volatility compared to traditional stock investments.
At HomeLife Paramount Realty, our experienced team guides investors through every step of commercial real estate investing, helping them make informed decisions aligned with their financial goals.
