Jun 7, 2013
Comments Off on Why Now is a Good Time To Buy Commercial Properties

Why Now is a Good Time To Buy Commercial Properties

In the current market, all commercial properties are on sale, because either cap rates have increased and/or vacancies have increased.

Increasing cap rates example:
Assume Net Operating Income is $120,000 per year and cap rates have increased from 6% to 8%

At 6% your purchase price would have been $2,000,000.
At 8% your purchase price would be $1,500,000.
You would receive a $500,000 discount, just due to the change in cap rates.
If you are a long term holder, you know that cap rates will go down again, so even if NOI does not increase, the value of the property will increase.

Vacancy increase example:
Assume a property at 100% occupancy has a Net Operating Income of $120,000 and it was previously leased at 95% occupancy which would produce a NOI of $114,000, but now it is leased at 85% occupancy, which would place the NOI at $102,000. This $12,000 decrease in NOI at a 6% cap rate means a $200,000 discount.

If you have any questions, feel free to leave a comment and I’ll respond.