A profitable way to invest your money is in retail real estate or shopping centers. However, it’s crucial to determine the potential return on investment before making any investment decisions (ROI). ROI is a metric used in finance to gauge an investment’s profitability. This blog post will go over how to figure out the return on investment for a retail property or shopping center.

Determine the Total Investment in Step 1

Establishing the total investment is the first step in calculating return on investment. This includes the cost of the property itself, closing fees, and any other costs incurred throughout the buying process. Include the costs of any upgrades or renovations you’ve made to the property along with your other expenses.

Consider buying a shopping center for $5 million, for instance. You spend an additional $500,000 on renovations, in addition to $150,000 in closing costs and other costs. The property would require a total investment of $5.65 million from you.

Calculate the Net Operating Income in Step 2 (NOI)

Estimating the property’s net operating income is the next step in the ROI calculation process (NOI). The NOI is the revenue produced by the asset, less any operating costs, but prior to debt service and taxes. You need to know the gross rental income and operating costs of the property in order to calculate NOI.

Gross rental income includes all rent payments made by tenants as well as any extra money made from parking fees, advertisements, or vending machines. Property management fees, property taxes, insurance, utilities, and maintenance costs are examples of operating expenses.

Let’s say, for illustration, that your shopping center generates $1 million in gross rental income annually. The property’s net operating income (NOI), which includes property management fees, property taxes, insurance, utilities, and maintenance costs, is $700,000.

Determine the Cash Flow in Step 3

Establishing the property’s cash flow is the third step. Following the payment of all debt service, taxes, and operating costs, the property’s cash flow is the income it generates. The debt service and any taxes must be subtracted from the NOI in order to calculate cash flow.

For instance, if your tax rate is 30% and your debt service is $250,000 per year, your cash flow would be $385,000 per year.

Calculate the ROI in step four

The ROI calculation is the last step. ROI is the return on your investment and is expressed as a percentage. Divide the cash flow by the total investment, then multiply the result by 100 to determine the ROI.

Your ROI would be determined by using the figures from the preceding examples, and would be as follows:

ROI = ($385,000 / $5.65 million) x 100 ROI = 6.81% ROI = (Cash Flow / Total Investment) x 100

The ROI for your investment in a retail property or shopping center in this example is 6.81%. This indicates that you can anticipate a return of 6.81 cents annually for every dollar you invested in the property.

Other Things to Think About

Even though return on investment (ROI) is a crucial metric for assessing the potential profitability of a retail property or shopping center investment, it is not the only thing to take into account. Market conditions, tenant occupancy rates, and the general condition of the property are just a few of the other variables that can affect how profitable a property is.

Additionally, it’s critical to remember that ROI does not imply future success. The profitability of your investment may be impacted by changes in the market and unforeseen costs.

An essential step in determining the potential profitability of your retail property or shopping center investment is calculating the ROI. You can better understand the potential return on your investment by taking the actions suggested in this blog.

It’s crucial to remember that ROI is not the only factor to take into account; unforeseen costs or market fluctuations may also have an impact on how profitable your investment will be. Before making any decisions, it’s critical to conduct thorough research and carefully consider all aspects of your investment. You can make wise decisions and potentially generate sizable returns on your investment in the retail property or shopping center industry if you have a thorough understanding of your investment potential.

F2H Capital Group is a debt advisory firm specializing in negotiating the best terms for your commercial real estate projects. The company offers a range of financial products and services, including fixed loans, bridge loans, and construction loans across all asset types. Please contact us for any of your financing needs.