Wednesday, July 24, 2013

Understand Gross and Net Income When Pricing a Commercial Property

woman using a calculator on desk
Check the income rents and the outgoings in any commercial real estate property sale.


When it comes to commercial and retail property performance today, it is essential that you understand the variables that relate to gross and net income.  You will find that knowledge essential when it comes to marketing the property for sale or for lease, and in negotiating.  That is certainly the case when it comes to an investment type property.

When you look at any property type within your sales territory or region, you will find averages that apply to the rental yields, and the net and gross income bases.  The modern properties locally will have higher and more predictable rentals; they will also have lower vacancy rates.  The older properties will be in a state of decline when it comes to gross and net rentals.  The older properties will have increasing vacancy rates.  On that basis you should carefully consider the properties that you work on when it comes to leasing and selling.

Choose the properties that provide the greater levels of enquiry and inspection opportunity.  Putting all of these financial facts together, understand the trends that apply to gross and net income.  That will be within your local area and the property type.  Here are some other factors to consider in this process:


  1. The rentals will change throughout the year based on the levels of supply and demand for vacant space.  For that reason, watch the new developments coming through the approval process.  A new development can shift the balance of market rentals, incentives, and supply.
  2. In any town or city, there are likely to be seasonal factors that apply to leasing vacant space.  That will be due to the local business cycles and business sentiment.  As part of your prospecting process, connect with all local businesses and tenants.  You can then assess the focus points and requirements of those groups when it comes to relocating, leasing, and purchasing quality investment property.  Track those needs and opportunities in your database.
  3. The gross rental for the property will reflect the total amount of rental income paid by the tenant or tenants.  Whilst it is quite desirable from a landlord perspective to have a higher gross income, the outgoings for the property will have an impact on the gross number to get to a lower net income.  It directly follows that you should understand the averages that apply to outgoings and rentals within various property types.  
  4. Any property with a high outgoings factor will quite likely be difficult to lease and sell.  When you list a property for sale or for lease, review the outgoings as they apply to the property today.  Also look at the history of those outgoings over time.  Look for any discrepancies or manipulated numbers.  When it comes to the final price paid for a property, and certainly in the case of an investment property, there will be a capitalisation or yield relationship between the net income and the price paid.  Within your territory your region, there will be certain averages that apply to the property type with that process.  Understand the averages.  That will then help you price any property for sale or for lease.


Some property owners will attempt to influence and escalate the net income by providing an outgoings understatement or misrepresentation.  That can get you into a serious amount of trouble when it comes to the property marketing, and the sales and leasing process.

When in any doubt about rentals and net income, ask more questions and comprehensively review the leases for the property.  Seek evidence relating to the property cash flow from the leases, and the outgoings re-conciliations.  Understand the averages that apply, and investigate the property accordingly.

You can get more tips on commercial real estate brokerage at our main website.