What does it mean to be a lower-class commercial real estate investor?

We usually divide commercial real estate investors into two categories: speculators and savvy investors. The former bets on the appreciation of market-oriented assets over time, that is, organic appreciation, but purely on the value growth over time according to market conditions. However, savvy investors know how to increase the value of assets, thus forcing them to appreciate.

How to force appreciation? To answer this question, we need to know some concepts that actually determine the value of commercial real estate assets.

The first is the concept of net operating income, namely NOI. Net operating income is equal to "the total income of the property minus all reasonable and necessary operating expenses". NOI is a pre-tax figure, excluding loan principal and interest, capital expenditure, depreciation and amortization.

The second factor that determines the value of an investment property is the capitalization rate. The upper limit rate of return is defined as the rate of return on real estate investment based on the expected income generated by real estate.

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This is the most important equation: the purchase price or property value depends on the net operating income divided by the capitalization rate. Price or property value = NOI/ maximum interest rate.

Suppose you did your due diligence and found the ideal investment property. This is an apartment building with a unit of 100. It is crowded, but there are opportunities for value-added, that is, the interior is outdated, some maintenance is delayed, and the rent is lower than the market. The current owner decided to move out and was unwilling to spend money to improve the property. It suits you very well.

You spent $8 million on that house. The current rent is $800 per set. For simplicity, we assume that there is no other income. In this case, the total income of the property is100x800x12 = USD 960,000. Assume that the total operating cost of the property is USD 480,000, and the expense ratio is 50%.

This will make our NOI equal to $480,000: $960,000-$480,000 = $480,000. The NOI is USD 480,000, the purchase price is USD 8 million, and the maximum purchase rate is 6%(NOI/ purchase price).

Now is the "magic" part: in the next 18-24 months, you will renovate the interior of the unit by replacing cabinets, adding new paint, updating countertops and equipment, upgrading fixtures and laying new floors. You can also use fresh paint to beautify the environment and make the appearance look brand new.

After decorating these units, you start to rent them at the market price, in this case, it is about $65,438+0,000 yuan per unit. The new income is 100x 1 0,000x12 =1200,000 USD. Assuming that the operating expenses are still 50%, the NOI is now $600,000. Assuming the highest tax rate remains unchanged, the new property valuation based on the above formula is $600,000/6% = $65,438+$00 million.

Please remember that you bought the property for $8 million and invested $6,543.8+0,000 in capital expenditure, which can increase its value to $6,543.8+0,000 within 24 months.