I am not talking about real estate where one resides I'm talking about real estate for the purpose of investment; that being commercial, industrial or residential. Not to my surprise this softening has yet to occur and perhaps it may not. It seems that most property owners feel that they are sitting on gold or at least they purport to be. The best gauge for detecting at what level prices are at, is the capitalization rate (cap rate). In a true economic slowdown cap rates would begin to rise. However cap rates for investment properties appear to be edging ever lower even at this time.

Let me explain cap rates and their meaning. The cap rate is a percentage of the net income on a property vs. the purchase price. For example if the cost of a property is $1,000,000 then a 7% cap rate would mean that the annual net profit, after all expenses except for the mortgage, would be $70,000. Without going into too much mathematical detail, at current commercial mortgage rates this cap rate would yield an annual profit of 2.6% on your capital investment. This is what I call a very poor return. My magic number is to purchase investment property at a cap rate of 10% or greater. Based on the same parameters as the example above a 10% cap rate would yield and annual profit of 12.7%. That sounds a lot better to me.

There are many different ways that one can approach the epidemic of low cap rates. It is difficult at this time to find investment properties at a 10% cap rate. However there are proven methods of finding or creating good value. One such method is finding a vacant or partially vacant property in a good location and with the help of a GOOD, hard working real estate agent, find a tenant or tenants who will lease the property. This must be done before waiving conditions on your purchase. Generally a vacant or partially vacant property is priced more reasonably then a fully leased one.

For more tips and information on how to purchase investment property please contact: www.commercialpropertymanagementconsulting.com.