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Posted by Jim Garrett, Vice President, National UC Realty
How common truths of homeownership can conceal hidden benefits of purchasing commercial property - Striking while the iron is hot.
One of the oldest and most widely practiced investments globally is real estate. For centuries, people have purchased houses and buildings with the hopes of establishing equity to be unlocked in a future sale. Not only are people enticed with the prospect of paying money to themselves (via monthly payments reducing their mortgage, as example), the idea of selling their asset for a greater value in the future is a risk that has historically paid-off.
The graphic above, sampled from the U.S. Census Bureau, illustrates that the historic Asking Sales Prices for homes have steadily increased over time (exception given to relatively small periods of recession which have rebounded), thus allowing home owners to buy assets at lower prices than their eventual sale’s price. Although real estate investment is something most people can conceptualize, especially given the “normalcy” of home-ownership nationally, treating a commercial property similarly may be opening you up to losing money.
When buying a home or building, many buyers and/or brokers utilize a “Comparable Approach.” The Comparable Approach allows users to forecast or establish the potential value of an asset based on similar like-kind assets that have been purchased or sold in the recent past. These market transfers are then used as a basis for establishing that an arm’s-length sale, or “market transaction,” has occurred. As an example, if someone is looking for a 3,000 square-foot retail building at 123 Main St., they may be able to use last month’s sale of the 3,000 square-foot retail building at 224 Main St. to derive a potential cost or value.
Although the Comparable Approach allows buyers and sellers to estimate what price the market may bear for a building or property (the physical asset), it does not account for the investment value a business or tenant can create when they have occupied the space. Once a property becomes an income-producing property, the cash-flows the property generates can be capitalized to arrive at an investment value.
The process outlined above is called capitalization. Capitalization involves multiplying the annual net income by a market factor, or dividing it by a capitalization rate (“Cap Rate” for short). This process weighs considerations such as risk, time, return on investments, and return of investment. It is most easily explained as the percentage return and investor would expect to achieve on an all-cash purchase. The strength of this approach is its reflection of typical investor considerations and behaviors as they analyze income-producing properties.
The diagram below helps illustrate how a property valued at $1,000,000 ($500,000 Land Cost + $500,000 Building Cost) can potentially lead to a capitalized value of $1,600,000+ based on the Cap Rate associated with the Tenant.
** Cap Rates fluctuate with interest rates, supply/demand, credit of tenant, and lease term. The Rate above is used for illustration purposes only.
As retail medical providers explore their real estate options within markets nationally, it is critical to go beyond the comparable approach of establishing market value based on the physical asset; it is crucial that urgent care operators understand the investment dynamic involved in income-producing properties so they can benefit from the value their business is bringing to the property. Furthermore, knowledge of rent capitalizations may allow a user to more effectively plan for the future and fuel growth by unlocking idle equity, reducing debt, and reinvesting capital in real estate to take advantage of market timing.
Due to cyclical fluctuations seen in the stock-market, and the inability for individual investors to directly control market influences, both investment groups and individuals are seeking income-producing property investments. The demand for this product has compressed Cap Rates and has increased the market’s valuation of income-producing properties. Today is a great time to consider unlocking the idle capital sitting in your property!
For more information on this topic, or Urgent Care Real Estate, please feel free to call or email via the contact information below.
National UC Realty (NUCR) specializes in Site Selection for Urgent Care Centers nationally and has completed over 400 Urgent Care transactions. By utilizing a proprietary, in-depth Urgent Care site scoring algorithm that analyzes demographics, psychographics, medical competition and other key metrics we’re able to increase confidence and decrease the time required to identify prime locations. Working with us is like having the nation’s best in-house Urgent Care site selection staff, without any of the overhead!
This blog article is a benefit of UCA's Corporate Support Partners (CSP) program. Thank you to National UC Realty, a Silver Level CSP.
Urgent Care Association
28600 Bella Vista Pkwy, Suite 2010
Warrenville, IL 60555
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