Mathematics of Commercial Property
Lots of people find commercial property an intriguing subject. This is probably thanks to the huge potential profits from any one deal. Of course, the converse is also true. If you are not careful you could also lose that much.
If you are interested in commercial property investing, then you need to understand some basic math. Just part of it will be basic addition and subtraction. (They are involved in the action though!) You need to be able to tell accurately what different numbers mean.
Misreading the numbers has been the downfall of many great investors. You can avoid their mistakes by knowing more about the issues at stake.
* Net operating income determines value - You will know the commercial property value if you know the net. You get net by subtraction operations costs from the gross income. What about a building that generates 5 million dollars each year? But you will get a net of ten dollars if the operations costs are 4,999,999. That building does not sound so good now, does it?
* Always be clear on the income versus expense - You definitely need hard numbers for this one. You need every number or you do not have enough information. These numbers are unacceptable as projections. Nor can you make assumptions about them. The wrong projection or assumption could lead to major losses. You can more solidly back deals if you know the values for certain.
* • Assumptions equal increased risk - Each assumption increases the risk in a deal You will never be able to be confident that an assumption is true. You must resist the attraction of deals based on assumptions. Some assumptions may be necessary though. For example, you might assume that a building will keep tenants. But this is still a risk issue.
It is definitely exciting to be involved with commercial property. It is one of the classic “millionaire-makers.” However, you must be realistic about every commercial property you consider. You can increase your odds of success by using care when investing in commercial property.