How to Achieve Maximum ROI in Real Estate
Likely the most appealing commercial real estate sector at the moment is retail real estate, which is experiencing a sharp rise in popularity now that shoppers are returning to brick-and-mortar stores. When you invest in retail real estate, it’s highly recommended that you regularly measure the investment’s performance to determine if you need to take steps to further improve your returns. You can determine how much money you make from an investment with the return on investment (ROI) measurement.
What Is ROI?
Return on investment allows you to learn how much money you’re bringing in from an investment once expenses are deducted. The ROI formula is as follows:
ROI = (Investment Gain – Investment Cost)/Cost of Investment
There are numerous factors that can affect the ROI for a piece of retail real estate, which include the interest rate for the loan, the size of the loan, and any expenses that must be paid to upgrade or maintain the property. ROI can be calculated via the out-of-pocket method or the cost method.
Average ROI for Retail Real Estate Investments
The average ROI that you should expect for a retail real estate investment differs. Depending on the specific details, a good return would be around 12% or higher. If you want to identify ROI with the cost method calculation, divide the current equity in your property by the costs that you paid to purchase and own it.
Let’s say that you bought a piece of retail real estate for $2 million and invested $600,000 in renovations. If the property is worth $4 million after renovations, you would have around $1.4 million in equity. The ROI calculation would be $1.4 million divided by $2.6 million, which would result in a 53.8% ROI.
How to Maximize Your Retail Real Estate ROI
There are numerous strategies you can implement to maximize your ROI in a retail real estate investment, with the primary detailed below.
Add Improvements to Retail Property
An effective way to bolster your ROI is by making improvements to your retail property. These improvements can help you increase your property value as well as occupancy rates. Your building should become more appealing to high-paying tenants.
While there are many types of improvements that can be made to a retail building, the ones that help most with your ROI are technological improvements. These enhancements can boost your property’s value and lower your total expenditures.
The installation of smart tech solutions can assist you in reducing energy costs and mitigating the need for expensive repairs. You could also lower your costs by investing in a newer retail property that requires less repairs and a lower amount of ongoing maintenance.
Purchase a More Affordable Property
You can also maximize your ROI by purchasing a retail property for a low price. Your ROI would then be calculated based on the low purchase price and all the debts/fees that you owe. If you partner with an experienced broker, you may be able to find a property at a lower rate than anticipated.
Before you invest, you should research the local market as well as the average returns for other retail properties in the vicinity. Performing due diligence ahead of the purchase can help you make the right investment.
Also, lower-priced retail properties could require substantial repairs or renovations. If the price is low enough, these improvements could increase the property value and improve your ROI.
Lower Your Annual Costs
You can improve your ROI by reducing your annual costs. To do this, take a thorough look at your property’s expenditures, which include everything from property management costs to interest on any debt payments. Then identify areas where you can make notable cuts.
As mentioned previously, installing new technology allows you to enhance the building’s overall functionality, which lowers maintenance costs. Another option is to hire an effective property management company that can reduce your annual expenses by helping you increase profits. This is great for those who don’t have a lot of free time on their hands.
Investing in retail real estate is a wonderful option when you want to diversify your portfolio and become familiar with different types of commercial real estate. With proper management and a good property, you could benefit from a high ROI that allows you to build your wealth for years to come.