Buying Income Producing Properties
Income producing properties are my favorite. Investing in a property that makes you money every month, it could be apartments, strip malls, industrial complexes, or maybe a hotel/motel. Most buyers and sellers will evaluate property based on CAP rates. A CAP rate is the return on the investment and is calculated by the net income of the property divided by the asking or sale price.
Market CAP rates can fluctuate depending on location, type of property, interest rates and type of tenants. When evaluating a property, you first want to make sure that the rents being charged to the tenants are at market or below market rents.
I’ve seen buyers purchase properties where the tenant was paying more than market rents, then when the tenant leaves they are renting out less than the previous tenant, making their net income less, there for the value of their property may have gone down.
For example you have a franchise tenant paying you 50000.00 net per year and the CAP rate is 5% so you purchase at $1000,000. Then the tenant leaves and now you can only get market rent which is 40,000 per year and the cap rate is still at 5%, so now your property is worth 800,000. You just lost 200,000 because you did not evaluate the rent prior to purchasing the property.
We see this a lot in our business and usually this client will now come to us and say well I paid 1000,000 so I want to ask 1.1 million. Now the cap rate on your asking price is 3.6% and all the buyers out there are looking for 5% or more… this is what we call a overpriced listing.
To learn more about purchasing income producing properties, please call Rick Toor at 604-897-0260.