All About the Return on Commercial Property Investment
Do you have an eye on commercial property investment in Costa Rica? Are you attracted by the good stories about commercial investment and feel it’s time to try your luck?
It is no doubt that commercial property investment provides more solid returns than other real estate investments, especially if you land a lucrative and appreciating property.
However, before putting your surplus money in commercial property you need to ask yourself, how much will you make at the end of the year? What is your return on investment? And how does commercial property compare with others like a rental investment?
Commercial property investment is a lucrative deal for those looking for a solid cash flow. Fortunately, that is exactly what the investment provides: a steady long-term cash flow with minimum maintenance and repair costs.
Therefore, when evaluating if the investment will generate a profit or a loss, investors usually look for a good return on investment (ROI). To understand what a good return on commercial property is, there are various aspects to consider as discussed in this article.
In other parts of the world, you can make a commercial property investment through a Real Estate Investment Trust (REIT). Bugis Credit can help in case it is challenging for you to invest. In Costa Rica, REIT’s are called Fondo de Inversion Inmobiliario.
There are lots of older office and industrial buildings for sale in Costa Rica. Those who stay behind in technology, usually have a much lower ROI. The reason is that rents of commercial property with old technology plummet immediately. Sufficient employee parking is also an issue.
The Covid 19 pandemic possibly changes the commercial property market in the future. We expect many companies to downsize their office space, due to their adaptability to work from home. Industrial warehouses will probably not suffer big changes. Commercial store space will probably take a while to get back to normal.
What Is A Good ROI?
Many investors and property managers will have different approaches when calculating a good return on commercial property. However, the following are assumptions that run across savvy investors’ minds:
- Commercial property yields should be higher than residential property investment.
- Returns should be higher than the cost of financing the property.
- The property should provide enough income to live off.
- The returns should outweigh the risks of investment.
Although every investor approaches commercial property investment differently, most investors think about yields when assessing a profitable property to invest in. Therefore, you’d like to understand the term commercial property yields better.
Commercial property yield is the average annual cash flow expected from the investment. Yields, also known as Returns on Investment (ROI) are expressed as the percentage of profits made from the investment in one year, divided by the cost of financing the property. It may sound complicated, but it is easier to calculate as ROI= (annual gains – the cost of finance) divided by the cost of financing the property.
The percentage ROI is an attractive number that pulls many investors into the rental market. However, instead of only seeing the phrase a good return on investment, an investor should consider other terms like gross yield and net yield.
Gross yield is the rate of returns a property generates every month. It is estimated based on the rent paid by the tenant divided by the property value.
On the other hand, the net yield is the final amount after deducting the expenses and outgoings such as repair and maintenance costs, HOA fees, mortgages, and taxes.
How to Calculate Rental Yield
According to real estate estimators, commercial property yields are much higher than residential property. The returns on commercial property investment are said to be between five and ten percent.
On the other hand, experts estimate residential property in Costa Rica to have a net yield between four and six percent.
Why the difference between the two types of investments in the same market? The answer lies in the lease agreement. This is because residential tenancies usually run for one to three years and therefore have a faster turnover. Commercial properties have occupancy for multiple years, sometimes as many as ten years.
As an investor, you can use the capitalization rate (cap rate) when trying to understand your return on investment. The capitalization rate uses the commercial property’s net operating income divided by the market value to find the potential ROI. You can also use this criterion to estimate your property’s potential return compared to the surrounding properties in the same market.
Capital Gain Tax
When selling commercial property in Costa Rica, investors have to pay the Costa Rican tax authorities 15% capital gain tax. Sellers should calculate this tax over the difference between the purchase price and the sales price of the property.
The big question is, what are your investment goals? No matter which type of real estate investment you choose, the value of your returns on investment depends on how you seize the opportunity. While other investors rush to grab all the lucrative deals in the market, ask yourself if you are looking for a potential cash flow to support you in retirement.
However, learn to turn complex ideas into simplicity so you can realize tangible returns with fewer efforts. GoDutch Realty is only involved in residential real estate and we have few commercial properties for sale. Nonetheless, we can connect you with our expert partners for your commercial property investment. Contact us now.
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