Commercial Real Estate Investment

The term ‘Commercial Real Estate’ refers to properties that are not residential. Any real estate can be considered as a commercial real estate, provided any one of the following criteria is met:

  • It generates revenue
  • It is rented out
  • It is for investments
  • It falls into any other category other than private residence

Understanding the fundamental nature of commercial real estate is vital since there are different rules that apply to residential versus commercial real estate.

Understanding Capitalization Rate

Some common approaches to valuing a business as a going concern involve determining a good measure of earning power and capitalizing it. This determines the value of the business to an investor based on the future returns he or she can reasonably expect. A Capitalization Rate, commonly referred to as a Cap Rate, serves as the basic metric to value a Real Estate deal. It is the yearly rate of return expected on an all cash investment in a real estate property.

For example