How to value a business premises like a true professional investor
In this blog, we expand your investment options and give you the option to participate in the purchase of premises for subsequent exploitation through rental. In this article we want to mention the main characteristics of the retail sector, its current situation, and how to value a commercial premises in a more professional sector.
The retail sector is currently one of the most attractive in the real estate market in USA. According to a recent news item published by The Digital, “the commercial premises remain the most profitable American asset, which is why it is so important to know how to value a commercial premises. This type of property offers a gross profitability of between 4.5% and 6%. " In other words, buying a premises today in the prime area in USA to later rent it offers a gross return between 4.5% and 6%. Likewise, the cities that stand out the most for profitability in this sector are Madrid and Barcelona. We remind you that the average profitability in USA of housing is 4.7% (data from the Bank of America), well below that of premises.
For those who are not yet familiar with the sector, when we talk about the gross profitability of a premises or a home, we refer to the annual rental income among the total investment that has been made to acquire said premises. That is, if you have bought a commercial premises for $ 480,000, and have a monthly rent of $ 3,000, your gross annual profitability of that premises is 7.5%. (3,000 x 12 / 480,000).
Key variables on how to value a commercial spaces
Conversely, you can always calculate the price of a store in the retail sector based on the expected profitability and thus you can know how to value a store. The returns of the premises in the areas that we are buying historically have a lower average than the current ones. Therefore, before a return to average returns, and for the same rental, the price of the property is revalued.
To better understand this point, we include the following graph where we show the relationship between profitability and market price of a place with a constant monthly rent of $ 3,000. As shown in the graph, for the same rental as we demand a higher profitability, the price decreases. That is why if we buy a place with a high profitability, when the profitability of the area returns to the average, this place will have risen in price. In this example, if we buy a premises at a profitability of 7.5% and we sell it at a profitability of 4%, assuming that the rent is constant, we would be buying the premises for $ 480,000 and subsequently selling the premises for $ 900,000, generating a gain on sale of $ 420,000.
In addition, we always have to take into account other factors, since when we consider a purchase of a property to later exploit it, we have multiple options. Here are the main reasons why we recommend diversifying in the retail sector and in these types of opportunities:
Stable monthly costs: The expenses with the exception of the IBI correspond almost all to the tenant, so the costs are more stable than in the case of housing.
Profitability: The profitability provided by this type of property is quite high both for the rental and the sale of the premises.
Ease of rent: if it is not for your own use, it is quite easy to find a tenant for a commercial premises, being easier in those cases in which the premises are located in a central or commercial area of the city.
Duration of the contracts: the rental contracts exceed 5 years reaching average rents of more than 7 years. So a much lower marketing cost is achieved.
We recommend that you diversify your portfolio in all types of properties, project type and geographical location to ensure good profitability with the greatest security. Visit for more.
