Determining Value of Properties: Commercial Lenders in Los Angeles
Any responsible investor knows it is crucial to perform an analysis on any potential investments being considered. In commercial real estate venture, investors/ commercial lenders in Los Angeles aim to put a value on a piece of commercial property in accordance with what the investor is looking to generate from the property. An investor may be looking for a stream of cash flows every month (passive investing), or he/she might want to purchase the property for the long term to build wealth, or the investor might want to buy the property, rehab it, and flip it for a profit. Whatever the scenario, the investor should perform a three part analysis taking into account three factors; net operating income, cash on cash return, cash flow, and cap rate.
- Net Operating Income (NOI) = effective gross income- operating expenses
- Cash flow= your annual cash flow in the net operating income minus the debt being serviced. You can also calculate monthly cash flow by dividing annual cash flow by 12.
- Cash-on-cash return= annual cash flow/down payment
- Cap rate= capitalization rate= NOI/ sales price
In processing these calculations, it is important to take into consideration a few guiding principles when analyzing the results. The first being that you have a positive cash flow. Second, you have a cash on cash return of 10 percent or greater. And third, you have a cap rate of 8 percent or greater.
For further information regarding property valuation, contact the leading commercial lenders in Los Angeles at HML Investments today.