Solomon C, Lao, CCIM. Your Partner In Commercial Real Estate.
Commercial properties are complex investment vehicles that can yield projected financial gains or result in unanticipated financial losses. Cash flow, finance terms, taxes, and myriads of other factors all have a significant impact on the financial performance of a commercial property.
You need a well plan before you make the purchase decision, such as investment goal setting, which including holding period, rate of return and cost of money....etc., and how to propose the purchase price to sellers? how to vesting the title? and, how to forecast the market trend? such as terminated Cap Rate and forecast the future Cash Flow.
The following is a investment cash flow chart;
Cash Flow Chart
holding period / years
The following calculation is the formula to determinate the purchase price to help investor achieve his investment goals
a) pv (-initial investment) + pmt (total cash flow during the holding period) + sale process (final sale price - all expenses - loan balance - gain) / 1 + rate of return (yield) = npv > or = 0
npv > or = 0 is a price can achieve the investor's investment goal, npv < 0 is a price can not achieve the investor's investment goal, so we need to lower the proposal price and recalculate it till the npv > or = 0. That is the price will achieve the investment goal.
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