A CAP RATE is the rate of return you receive on your investment. So, if you buy a $200,000 property and it nets you $12,000 – that is a 6% cap rate.
Unfortunately, investment properties frequently post a cap rate that is NOT accurate. The most common element of this “misinformation” concerns property expenses. Expenses should be all inclusive and reasonable. The lower the expenses, the higher the net return to the owner and the higher the net return to the owner – the higher the cap rate.
If a property expenses sheet shows $20,000 in expenses – is that the whole story? Probably not. Large capital items such as roofs, HVAC equipment, etc., should have an annual savings account for future expenditure. If a roof will cost $50,000 and will last 20 years and the expense sheet shows no expense for a roof – then you are not seeing true expenses.
Take your time and do a thorough analysis of the property expenses – by doing so you will make a far wiser decision on the real value of the property.
Next to zoning, environmental issues are the next most important factor when buying commercial/ industrial properties. The way in which property owners treated various chemicals a number of decades ago has a major impact when you buy properties today. If you buy a tainted property, you could well be responsible for the cost of remediation (even though you didn’t create the problem).
A Phase I Environmental Audit done during your “due diligence period” by a reputable contractor will give you a history of the property and the contractor will make appropriate recommendations for further investigations (Phase II) for any areas of suspected contamination or concern. Most contamination can be dealt with – but it takes time, money and experience.
A good ENVIRONMENTAL ATTORNEY and an ENVIRONMENTAL CONTRACTOR can walk you through the process. Obtaining an ACT 2 closure from the Pennsylvania Department of Resources will relieve you of the burden concerning a particular contaminate. This way, you can buy a “tainted” property and still be protected.
Take the time to investigate this early in your research. Every municipality has its’ zoning map and zoning ordinance online. Just because an information flyer says the property is zoned “Industrial” doesn’t necessarily mean the information is correct.
Now you have the information to know whether your planned use will be allowable for the property you are considering. Call an expert realtor at Brode and Brooks, Inc. if you have questions!
Brode and Brooks, Inc. Real Estate Agents and Brokers in Pennsburg PA Sell, Buy, Rent or Lease Residential Homes, Land or Commercial & Industrial Properties. All rights reserved worldwide.
215-679-4200
info@brodeandbrooks.com
418 Main Street, Pennsburg, PA 18073