Why Financial Forecasting Is Essential for Your Commercial Property
In any investment endeavor, the ultimate goal is to bring-in revenue. But with the potential for profit there is also a possibility of loss. In commercial real estate management, this is why calculating the cash flow of a property can help determine its lifecycle, earning potential, and even its risks.
Cash flow is a critical metric when considering whether to invest in a property. A property’s cash flow is essentially the profit you make after pooling all sources of income and subtracting any operating expenses:
CASH FLOW = Sources of income – All expenses & cash reserves
Even though cash flow is a fairly straightforward concept, forecasting cash flow in commercial real estate fluctuates depending on several factors, including but not limited to:
- The type of real estate property (residential, office, retail, and industrial) due to the unique sources of income and expenses of each.
- The market or location of the property (suburban or urban, this city compared to another city).
- Current value and rent growth.
Scrutinizing every factor and its contribution to your cash flow is essential in order to accurately predict the future earnings and success of your commercial property.
Type of Real Estate Property
Commercial real estate property types naturally differ in their sources of income and expenses, with some being more complicated than others. The tenant turnover, utilities, insurance rates, and property taxes are examples of expenses that can vary widely depending on the property type.
Consider this scenario: The occupancy of an office space is expected to peak at 95% but average 87% in the long run. The occupancy of an industrial space is also predicted to peak at 95%, but it has a higher long-term average occupancy of 92%. In simple terms, the stability and potential for overall return on investment would be higher for the industrial property than for the office space.
Location of the Property
The market or location of your property is one of the biggest contributors to your bottom line. You will need to evaluate sub-factors regarding the location, as well, such as expected costs or fees within the area, whether or not there are competitors nearby, and the demand for properties similar to yours.
For example, it is likely that a residential property’s gross income is inevitably going to be higher if it is located in a city rather than a rural area because the cost of rent is expected to be higher. At the same time, an urban residential property’s purchase cost, taxes, and maintenance will likely be bigger expenses than those of a rural property.
Current Value & Rent Growth
Speaking of rent, the current rental rate – and any likelihood that tenants will be willing to pay more – is worth considering if you want to increase your cash flow down the line. Another name for this is speculative rent, which can be determined using tools such as Marketing Leasing Assumptions (MLA’s).
The current value and desirability of your property will include factors previously mentioned, including the type of property, its location, any local competitors, and its current profits. The more desirable and in-demand your property is, the more potential for growth – and income.
Utilize A Property Expert, Manager
Southeast Venture’s experience with commercial properties in and around Nashville gives our property managers valuable insight into how thoughtful administrative decisions will benefit the economic performance of an operating property.
Learn about our comprehensive property management services, which include financial forecasting, annual budget preparation, income and expense monitoring, and much more.