When it comes to investing in commercial properties, it’s important that you squeeze out every last drop of ROI that you can. However, this is often easier said than done. If you’re serious about improving the bottom line, you must be prepared to make some strategic decisions.
Setting Your Target ROI
Every commercial real estate investor should have a very clear idea of what their target ROI is before ever investing a single penny into a property. Your target might change – and it’s always the hope that you’ll exceed the target – but you have to go into any deal with a goal of where you want to be.
There are lots of different ways to calculate a rate of return, including a straightforward ROI calculation and cap rate formula. However, assuming you’re buying mortgage-financed investments, you’re probably most interested in cash on cash return.
Cash on cash return basically tells you what percentage you’re earning annually based on the cash you actually put into the investment. In other words, if you put down $100k on a $300k property, your CoC return tells you what percentage you’re making on the $100k, not the $300k.
When it comes to a cash on cash return, every real estate investor has different goals. Most investors are looking for a minimum of 8 percent CoC return, though some will look for 10 to 12 percent. Make sure you’re clear on what you need to get out of a deal.
4 Tips for Improving Your ROI
While you should never buy a property that you don’t confidently believe will hit your target ROI, this doesn’t mean you should settle. There are plenty of opportunities for surpassing target ROI and getting even beefier returns.
Here are several tips:
- Buy Properties With Untapped Potential
When searching for new investment properties, look for ones that have lots of untapped potential. In other words, keep an eye out for properties that have unfinished square footage, large lots with room to build out, dated finishes that can be easily upgraded for a more modern aesthetic, etc.
- Reduce Annual Costs
It’s easy to get so focused on increasing income that you forget about the expense side of the ROI equation. You can also enhance your return by simply lowering your annual costs. Possible options include switching to more energy efficient appliances, lowering your property tax burden, or offloading some of the responsibility for utilities onto your tenants.
- Hire a Property Management Company
At first glance, it would seem that hiring a property manager would actually lower your ROI by increasing your expenses. However, in almost every case, a good commercial property management company, like Crown Commercial Property Management in Los Angeles, actually adds value. They ensure every aspect of the property is streamlined and as cost-efficient as possible.
- Add Additional Streams of Income
When you own an investment property, you should always be looking for ways to increase income. One way to do this is by adding new streams of revenue that multiply your rate of return without having to constantly raise rents.
The exact revenue streams you use will depend on the type of property and other circumstances, but here are several options to get your creative juices flowing:
- Charge for public parking during non-business hours. (This works especially well if you own a commercial property in a busy downtown area and/or are located near a sports arena or event venue that needs additional parking.)
- Sell goods or inventory that building tenants need. For example, if you run a storage unit, you could set up a basic storefront where you sell moving boxes, tape, locks, and other supplies. If you own an office building with several businesses as tenants, you could sell printing services.
- Add a laundromat to charge for people to use it. and charge for people to use it. This is an easy way to increase income without having to spend a lot on infrastructure.
Adding it All Up
When investing in commercial real estate, ROI is everything. As this article shows, there are plenty of ways to increase your return with a little creativity. Don’t overwhelm yourself by trying to do everything at once. Stay focused and look for small ways to move the needle in a positive direction.
Over time, consistent focus on enhancing ROI will lead to a much more profitable portfolio.