Most investors who are looking to buy commercial real estate want to know what the future value of that asset is or at least how long it will take them to earn back the money they invested in the asset. This is especially important for an investor who is seeking funding through a hard money lender in New York because he needs to know how long it will take him to repay that short-term funding and begin seeing the real rate of return for his investment.
How Important Is the Cap Rate and ROI when Choosing a Property?
While it is certainly something an investor usually considers when making a decision its importance may be somewhat exaggerated according to some seasoned investors. The reason they see it this way is because the cap rate is simply the Net Operating Income (NOI) divided by the original cost of the asset. This equation does not take into account any financing costs that may be associated with the acquisition of the asset. While this figure may be important to many investors, its volatile nature makes it at least partially unreliable as a means for determining the future profitability of an asset.
Choosing a Property without Looking at Cap Rate: Advisable or Not?
One question that comes to mind is whether it is advisable to choose a commercial property without taking the cap rate into account. The key factor in this equation is how long the investor is looking to hold on to the investment. A long term investment may not require as much emphasis on the cap rate and ROI (Return on Investment) in the purchasing phase of the project and may in fact hinder the investor or make him question his decision. Since the cap rate is intended to show an investor how long it may take him to recoup his investment in an asset, those who plan to hold on to the investment for longer periods will be less concerned about the cap rate as will investors who do not obtain funding through any hard money lenders in NY. These short-term funding sources increase the need for determining the cap rate.
Commercial Real Estate Agents Can Help Find the Right Deal
One of the best ways to find the right property even without considering the cap rate is by working with a commercial real estate agent. Since there are other factors that are part of a property’s overall profitability, you can acquire this information by talking to the real estate agent and the seller of the property. Many factors affect the sales price of commercial real estate, factors that have no bearing whatsoever on residential real estate. The cost of commercial real estate can be “forced,” thus creating a negative sense of security for commercial property investors. It is more reliable to review sales and financial records that are solid rather than relying on a formula that depends on an extremely volatile market.