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to topic listingYield Expectation
What factors impact the value and return of each investment?
An Investment property has three (3) major areas that impact the perceived and potential investment value.
1) LEASE QUALITY
The Lease document, is very important since it contains the clauses which define how "net" the lease is. The lease determines the landlord or owners' involvement in management, and the expenses associated with the operations of the property. The lease also defines the rental stream and its increases (if any), provides the basis for Lease Renewal Option Periods (if any) and sets out the conditions by which a tenant may terminate the lease or reduce its' rent. The lease document is the "blue-print" of the investment and all potential investors are advised to carefully review, with their legal counsel, the lease document very carefully.
2) TENANT QUALITY
The Quality of the Tenant is also very instrumental in determining the value of the investment. Generally speaking, the better or higher the credit or net worth of the tenant, the lower the perceived risk of the investment. Investor's usually are willing to trade return for risk, and accept smaller overall returns in exchange for high-quality virtually risk-free Tenants on the lease. Lesser credit or lower quality Tenants are often very good investments however, because although not considered Investment Grade they are sometimes very good companies that do not have a corporate bond rating because of lack of corporate debt, and or, have a very good story and history and in today's world are often targets of mergers and acquisitions which can lead to credit enhancement. Should this occur, the Investor can realize a better than normal return while receiving the security of a "high credit" Tenant.
3) REAL ESTATE QUALITY
The Location of the property is often considered the most important element in real estate. The old adage; location, location, location was coined because many investors, developers, tenants, lenders and landlords put significant stock in the properties' current and long-term residual value. A property that is leased to an "investment grade" Tenant, under a bond-type lease can still be considered less than desirable if it is in a poor quality or inferior location. Investors' should physically visit any potential acquisition, and review the demographics and other statistical data available prior to rendering a decision.
All three of these factors (individually and collectively) have significant influence on the perceived value of a property. A property can be very well-located, have an excellent lease with substantial increases in the rent, yet be leased to a tenant that one may consider speculative at best and potentially headed toward bankruptcy, which will usually lower the value placed on the investment.
No single value component carries more weight than the others. Investors in investment properties should carefully consider each of these factors individually, as well as in combination as they assign their perception of value to the investment property.
What kind of returns can I expect?
An investor can expect to purchase net leased properties at a "Cap Rate" basis at between 6.50% to 10.00%, "Cash on Cash" (COC) returns of 0 - 9% and After Tax, Internal Rates of Return (IRR) of 8 - 15%. Of course, many variables have a significant impact on these measures.
