You have decided to invest in commercial real estate in Florida. Congratulations! Investing in property is a good  that can yield positive cash flow. A savvy investor can make $1k - 10k a month by investing in commercial real estate. To achieve this, the investor must understand the concepts of rate of investment and the cap rate formula, and heed our tips on smart investing that are listed later in this article.

Now that you have decided to pursue investing in property as a way of adding to your personal wealth, you have some work to do before you can earn $1k - 10k a month. However, if you follow our tips, the process of investing in property will be simplified and significantly less frustrating. The first step is understanding what the rate of investment is, and how it impacts your planning and investment.

Investors serious about investing in property in Florida would be wise to calculate the rate of investment and use the cap rate formula when determining when and where to purchase their commercial properties. Although they are not perfect indicators of an investment’s future, the rate of investment and use the cap rate formula help savvy businesspeople determine how to best spend and invest their money, including the estimated $1k - 10k a month that a commercial rental property can earn.

What is a Rate of Investment?

Rate of Investment is the benefit to an investor that results from an investment of some resource. In its most pure, abstract economic terms, the rate of investment is one way of relating profits to capital invested. The rate of investment can be calculated using a simple formula: the rate of investment = Net income / amount of invested money.

The rate of investment can be used as a performance measure. The rate of investment evaluates an investment’s efficiency or compares several investments’ efficiencies. If an investment's gains compare favorably to its cost, this yields a high rate of investment.

The purpose of rate of investment is to measure the rates of return on money invested, per period, to better provide investors with information regarding the feasibility and economic viability of an investment. In practice, the investment with the largest rate of investment is prioritized. Although the rate of investment has traditionally been used in commercial investments, the concept of rate of investment has been applied to governmental scientific funding agencies, like the National Science Foundation, investments in research in things like open source hardware and any subsequent returns of direct digital replication. Thus, the rate of investment is not just something investors and businesspeople use.

Click here to get a list of properties with a proven rate of investment.

Rate of investment offers a brief summary of an investment’s profitability, which is useful for individuals investing in property. The rate of investment is adjusted for the size of an investment’s assets that would be connected with a specific economic venture. The rate of investment can be compared to expected and/or required rates of return on invested money. It must be noted that the rate of investment is not a net present value-adjusted value.

Rate of investment can, and should, determine marketing decisions. Individuals who are interested in investing in property should understand the economic position they occupy, as well as the potential returns an investment could yield.

Rate of investment can be applied to investments that are not strictly economic, and can calculate an investment in terms other than financial gain. The social rate of investment, for example, measures “extra-financial values,” such as environmental and social values of investments that are not usually considered a part of conventional financial accounting. This measure can help investors better understand how stakeholders will be impacted and identify additional ways to improve investment performance.

The Cap Rate Formula every investor needs to know

Rate of investment and the cap rate formula are different ways of assessing an investment’s progress and potential. Both measure something different, but work well together to help investors understand their investments’ risks and futures. The cap rate formula is a fundamental concept used in the commercial real estate industry, but you do not have to be an accountant to calculate a cap rate. The cap rate formula is easy to calculate. It is simply the ratio of Net Operating Income (NOI) to the property asset value.

An Overview of the Cap Rate Formula

What precisely does the cap rate tell an investor, and why is it so important? The easy to use cap rate formula is a way to predict the percentage return that an investor would receive on an all cash purchase.

The cap rate formula is a commonly used and useful ratio that individuals interested in investing in property can use to make better investments and predictions. It can be used to quickly estimate an acquisition relative to other potential investment properties. The cap rate formula and the predictions it enables an investor to make assumptions about market trends and the direction of valuations.

The cap rate formula allows investors to make quick calculations, but they should not be used in all contexts. The cap rate formula could not be applied to a property with a complex and irregular net operating income stream, for example; however, a full discounted cash flow analysis would yield a credible and reliable valuation in this case.

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Cap Rate Formula Examples

To put it into concrete terms, if you find a property that listed for $100,000 and generated a Net Operating Income of $10,000, the cap rate would be $10,000/$100,000—or 10%. Although the numbers we use in this example are fairly simple, this formula can be applied, quite easily, to a wide range of numbers. This example is rather abstract and academic, but these numbers are easy to generate if you make $1k - 10k a month in rent, which is feasible when you invest in property in Florida.

Other Cap Rate Formulas

Other ways of calculating a cap rate include the band of investment method and the Gordon Model. The band of investment method calculates the return to both the lender and the equity investors in a deal, and is a weighted average of the return on debt and the required return on equity. 

In the Gordon Model, the formula solves for Value, given cash flow, the discount rate, and a constant growth rate. Simplified, this means that Value = Net Operating Income/Cap. That is, the cap rate is simply the discount rate minus the growth rate.

Regardless of what cap rate formula you use, be certain that your assumptions are correct and that your numbers are accurate. Otherwise, the calculations are essentially useless.

Thinking about investing in property? Click here for a list of properties that could be right for you.

Investing in Property: Tips for Commercial Real Estate Investors

• Pay attention to the neighborhood. The neighborhood in which the property is located will affect and influence the tenants that your property attracts. Investing in property in the right neighborhood can net you $1k - 10k a month and yield a high rate of investment.
• Estimate the property taxes. Property taxes are not standard and, if you are investing in property with the intention of making a profit from charging rent, you must be able to estimate how much you will lose to taxes. You can still make $1k - 10k a month on an investment property, but higher taxes will cut into those profits.
• Know that area’s crime rate. A neighborhood’s crime rate will be among the factors that potential tenants note. If your intention is to make$1k - 10k a month in rent, your best bet is to invest in property in an area that has a low enough crime rate that will attract successful tenants and that potential property damage will not cut into your profits. If you make $1k - 10k a month but have to pay a significant amount to insure your commercial property, the investment hardly seems worth the effort.
• Know that area’s job market. A robust local economy means more thriving businesses. Investing in property in this local economy is wise; your potential commercial tenants are more likely to have a successful business, and in turn, this will allow you to make$1k - 10k a month.
• Understand the investment property’s building permits and future development. The municipal planning department will have publicly available information on new developments and what has been zoned into the area, which allows you to better understand future =commercial and residential development in that location. This information will enable you to better market the property to potential tenants, and could easily charge $1k - 10k a month if you appeal to the right tenants.
• Know how many listings and vacancies are currently in the area. If you are considering investing in property, you want to know how competitive the market is. If the neighborhood has a number of listings, you can deduce certain facts about its marketability. If you choose to invest in property in such a neighborhood, this information will help you establish rental rates so that you can cover any potential vacancies without cutting too much into the $1k - 10k a month you make while renting the property.
• Know the rents of other comparable real estate properties. If you are investing in property, you want the rents to be competitive. By setting a good rate and attracting the right tenants, you can make $1k - 10k a month.
• Understand the neighborhood’s potential for natural disasters. Florida has a great climate—warm winters, comfortable summers—but it also has the potential for hurricanes. You must consider how to prepare for such an event, including how you will finance any necessary additional insurance for the property, which can be part of the $1k - 10k a month you make from renting the commercial property.

Investing in property: What You Can Do Now

If you have made the decision to invest in property in Florida, follow the investment tips that we listed earlier in this article. Once you have identified the commercial property in which you want to invest, use the cap rate formula to calculate the potential return you will have on this property. Once you have rented the property, you can use the rate of investment to measure whether your investment is heading in the intended direction or whether you need to make some corrections to your investment plan.

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