There are many segments of real estate including residential, land, leases, multifamily, farm and ranch, timeshares, and commercial. There are subcategories that further classify the type of property. For example, there is residential land and commercial land, residential stick-built (single-family) or condo, and commercial office or a business opportunity. Commercial real estate specifically refers to properties used for business purposes including office space, retail space, industrial use, restaurants and more.
Commercial Real Estate Investing
Commercial real estate (CRE) can be a great opportunity to profit through renting space while gaining appreciation, or using the space for an owner-occupied business. Economic growth, population growth, and tourism - a large part of Durango’s commercial industry - factor into commercial investing. As these increase, so does the demand for commercial growth, including retail, restaurants, accommodation (long and short term), and jobs.
One of the most versatile types of properties is mixed-use, which allows a combination of residential and commercial. These offer a unique opportunity to live and work in the same building.
Cap Rate
When evaluating commercial properties, one key measure of financial viability is the capitalization rate (cap rate). This percentage is calculated by dividing the property’s net operating income (NOI) by the current market value. NOI is derived by subtracting the operating expenses - such as insurance, property taxes, and maintenance - from the total revenue generated from the property. While comparing the cap rates of various properties can help assess investment potential, other critical factors include location, stability, and growth potential.
Return on Investment
Return on investment (ROI) is calculated by adding the operating income to the sale price, subtracting the acquisition cost, then dividing that number by the acquisition cost. In a cash sale it is simpler: subtract the total investment cost from the final sale price and divide this by the investment cost. Ideally, an investment has an ROI above 10%.
Cash Flow
Cash flow is a broad term often used to describe the profit generated by a business or investment property. However, NOI and cash flow before tax provide deeper insight into a property’s financial performance. A common guideline, known as the 1% rule, suggests that a property should generate at least 1% of its purchase price in monthly rental income. It’s important to note that this rule is a quick assessment tool and does not consider all expenses, location variations, or market conditions.
Capital Gains
In real estate investing, planning for capital gains taxes is crucial. Capital gains taxes are incurred when a property sells and are based on the difference between purchase price and sales price. Work with your accountant to ensure you understand the costs when selling, and you may also benefit from exemptions such as a 1031 exchange.
Tips for Investing in Commercial Real Estate
Understanding local market dynamics, demographics, trends, and zoning regulations will help you find the best investment based on your needs. Engaging local RealtorsⓇ and property managers who specialize in commercial real estate in Colorado is essential in navigating the complexities of the market and contracts.
Commercial real estate in Southwest Colorado offers great opportunities for investors and businesses alike. Click here to start your commercial real estate search in the Durango area today, and please let Max Hutcheson and Deven Meininger know if you have any questions about commercial real estate.
