Many commercial property owners are wondering when the time will be right to sell their commercial real estate. They have misgivings about the federal government’s policy concerning interest rates. In most cases, it takes a professional commercial and industrial real estate professional to answer these questions.
It is true that interest rates are currently rising, which signals to most property owners that there will be an increased risk on their parts. But when interest rates are rising, the result is that the cost of mortgage capital increases. However, according to Investopedia, mortgage rates make up only a portion of the interest-related factors to be considered. The status of interest rates also influences capital flows, which is the “supply and demand” for investors’ expected “rates of return” on their investment and their capital.
Valuation
Forecasting property income to establish net operating income (cash flow) can:
- add anticipated lease payments
- calculate the average occupancy (hotels) X the average room cost
- deduct all property-level expenses
- deduct financing costs
- deduct payments of funds used for financing (capital costs)
- deduct investment capital (maintenance, repair, non-property-specific expenses)
The sum of these actions results in attaining net cash flow (NCF). Although interest rates can affect mortgage rates in a big way, and they also influence the cost of financing. This will, in turn, influence property-level costs and values. The higher impact on required rates of return (RROR) and investment values comes from supply and demand for capital, along with competing investments.
Factors Affecting Investment Cap Rate
When an investor divides the net operating income (NOI) of a property by the market value or purchase price, he or she will have come up with the “cap rate.” The higher the percentage of cap rate, the higher the risk of investment. But high-risk investments bring in a better return. Alternately, the lower the risk involved in purchasing a property, the less profit to be made.
Luckily, property ratings change and can have a different meaning in different situations. It is to the investor’s advantage to be patient for potential profits at a later date.
High-Risk Factors
- above or below market rent rates
- location
- length of lease term
- interest rates
- growth
- supply and demand
- the financial strength of the tenant
- the credit rating of tenant
- property type
Just remember, when property prices drop and cap rates increase, the time to sell your investment may be upon you.
Talk to a commercial mortgage agent to understand the complexities of commercial and industrial investments. The massive amount of data used to discover whether a property’s financial potential is sound can be complicated. Mortgage professionals have made it their business to be available to assist investors and work with them step by step through the selling/buying process.