Assured Returns and Lease Guarantees: Why Commercial Real Estate Investment is a Good Option for Investors?
Commercial real estate investment is a viable option for investors looking to diversify their portfolio and secure stable returns. Unlike residential real estate, commercial real estate investments offer various advantages, including assured returns during the construction period and lease guarantees after possession. In this article, we will discuss how commercial real estate investment provides assured returns during construction and lease guarantees after possession, and why it’s a good option for investors who have already made returns with residential investments.
Assured Returns During Construction Period:
Commercial real estate investments often offer assured returns during the construction period, which can range from 9-18% per annum. This means that the developer guarantees a certain return to the investor during the construction period, regardless of the project’s actual performance. The developer may offer this guarantee to attract investors, raise funds, and secure loans for the project. These returns are often paid out in installments during the construction period, and investors may also receive a lump sum payment after possession.
The assured returns during the construction period provide investors with a stable source of income and reduce the risks associated with delays or cancellations in the project. This is especially beneficial for investors who may not have the expertise or time to manage the project themselves.
Lease Guarantee After Possession:
Commercial real estate investments also offer lease guarantees after possession, which means that the developer guarantees a certain amount of rent to the investor for a fixed period, usually 3-5 years, after possession. The lease guarantee provides investors with a stable source of income and reduces the risks associated with finding tenants and managing the property themselves.
The developer’s standing, financial stability, and the demand for commercial real estate in the area frequently support the lease guarantee. The developer may also offer other incentives, such as a rent escalation clause, which allows the rent to increase by a fixed percentage every year, or a buyback option, which allows investors to sell their units back to the developer after the lease period.
Why Commercial Real Estate Investment is Good for Investors:
Commercial real estate investment is a good option for investors who have already made returns with residential investments because it provides diversification, stable returns, and capital appreciation potential. Commercial real estate investments are less volatile than residential investments and are less affected by market fluctuations. Additionally, commercial real estate investments offer higher rental yields and longer lease terms, which provide a stable source of income for investors.
In conclusion, commercial real estate investment provides investors with assured returns during the construction period and lease guarantees after possession, making it a viable option for investors looking to diversify their portfolio and secure stable returns. This is especially beneficial for investors who have already made returns with residential investments and are looking for new opportunities to grow their wealth. However, it’s important to conduct thorough due diligence before investing in any commercial real estate project and seek professional advice to mitigate risks and maximize returns.
How do you calculate rental yield, capitalisation for the above investment?
To calculate the rental yield and capitalization rate for a commercial real estate investment, the following formulas can be used:
Rental Yield:
Rental Yield = (Annual Rental Income / Total Property Cost) x 100
The annual rental income can be calculated by multiplying the monthly rent by 12. The total property cost includes the purchase price, stamp duty, legal fees, and other expenses.
For example, if an investor purchases a commercial property for INR 1 crore and receives an annual rental income of INR 10 lakhs, the rental yield would be:
Rental Yield = (10,00,000 / 1,00,00,000) x 100 = 10%
Capitalization Rate:
Capitalization Rate = (Net Operating Income / Property Value) x 100
The net operating income (NOI) is the property’s annual income after deducting operating expenses such as property taxes, insurance, maintenance costs, and management fees. The property value is the market value of the property.
For example, if an investor purchases a commercial property for INR 1 crore and generates an NOI of INR 8 lakhs, the capitalization rate would be:
Capitalization Rate = (8,00,000 / 1,00,00,000) x 100 = 8%
Both rental yield and capitalization rate are important metrics for evaluating the performance of a commercial real estate investment. A higher rental yield and capitalization rate indicate a better return on investment, while a lower rental yield and capitalization rate suggest a lower return on investment. It’s important to calculate these metrics accurately and factor in all the expenses and risks associated with the investment to make an informed decision.
How can you calculate the capitalization rate based on the rental value per square foot, and how can you determine the property’s price per square foot using the same capitalization rate?
To determine the capitalization rate from the rental value per square foot, the following formula can be used:
Capitalization Rate = (Net Operating Income / Property Value) x 100
Here, the net operating income (NOI) would be the annual rental income generated per square foot after deducting the operating expenses. The property value would be the market value of the property per square foot.
For example, if the annual rental income per square foot is INR 100, and the operating expenses per square foot are INR 20, the NOI would be INR 80. If the market value of the property per square foot is INR 1000, the capitalization rate would be:
Capitalization Rate = (80 / 1000) x 100 = 8%
To determine the price per square foot using the same capitalization rate, the following formula can be used:
Price Per Square Foot = (Net Operating Income / Capitalization Rate)
Using the example above, if the NOI is INR 80 and the capitalization rate is 8%, the price per square foot would be:
Price Per Square Foot = (80 / 8%) = INR 1000
Therefore, the property’s market value per square foot would be INR 1000, assuming an 8% capitalization rate and an NOI of INR 80 per square foot.
It’s important to note that the capitalization rate and price per square foot can vary depending on various factors such as the location, property type, tenant quality, and market conditions. Therefore, it’s crucial to conduct thorough research and analysis before making any investment decisions.
