How much money should be expected to be made from a commercial real estate investment?
Let’s look at an example scenario and determine a projected return on actual money invested.
XYZ Company makes a $4,000,000 real estate purchase. In the Puget Sound market that could be an approximately 27,000 square foot industrial/office building (depending on specific submarket and a variety of other factors). As a user, the required down payment would typically be between 10% to 20% of the value. For our example, let’s look at a 10-year return on a 20% down payment. We will assume current market interest rates (5.4% in our example) and 3% average yearly appreciation of the building over the holding period. Under those metrics, the average yearly return of the $800,000 invested would be 14.17% over a 10-year period. This result considers selling costs at the end of the 10 year period. It also factors in market rent even though the company is effectively paying rent to itself. That attractive projection explains why commercial real estate stays in high demand.
Can we get much higher? Yes, through SBA financing, a loan of 90% of the building’s value can be obtained. For our $4,000,000 purchase – that is a $400,000 down payment and the projected average yearly return over the 10-year period becomes almost 18%. Real estate comes with risk, but the returns can be attractive.
What does this mean in real numbers? In the instance of investing $800,000 – that initial investment turns into just over $3,000,000 in 10 years. Or if investing $400,000 – just over $2,000,000. Of course, this all comes with the standard risk associated with real estate investing. For example, it’s not a given that appreciation will average 3% per year or that it will appreciate at all. However, if you’ve decided the risk profile is right for you and your company, then an annualized effective compound rate between 14% and 18% can be a realistic expectation.
Working with a quality commercial real estate broker can be key to maximizing your real estate opportunities. Springer Real Estate is a commercial real estate company dedicated to our clients’ real estate objectives. We handle sales and leasing for buyers, sellers and tenants. Feel free to reach out to us to discuss your specific commercial real estate interests.