- December 14, 2021
- 1185
- Rent
Knowing how to calculate the monthly rent and the ROI of a property for sale is the key factor between having a good or a bad investment. You don´t need to know exactly how much will the property for sale´s monthly rent be since the market tends to be unstable. However, knowing how to calculate it makes you able to predict your chances of success.
If you evaluate a rental property for sale, you´ll need to learn how to calculate your property´s ROI as well as its monthly rent. You can calculate the numbers on paper or with a rental property calculator. This will help you be more realistic about how much will the cost be for your property for sale.
In this article, we´ll talk about the basics of this. We´ll discuss:
1-How to calculate the monthly cost of renting commercial property for lease
2-Benefits of commercial tenants
3-How to negotiate rent with your new or existing tenant
4-What is an ROI
5-How to calculate estimated/potential ROI on your rental property
6-What is a good ROI for a rental property?
7-How can Connect Property help you estimate the monthly rate of your commercial property?
1-How to calculate the monthly cost of renting commercial property for lease
One of the main factors to calculate the monthly rent of your property for sale is its monthly cost. Nevertheless, calculating it can be a difficult task for investors. The main things needed to calculate your monthly lease amount are 3 factors:
- The leased space´s square footage.
- The landlord’s quoted rental rate.
- The number 12 (as simple as this seems, this is important since it’s the number of months in a year).
These 3 things are applied to the process of calculating the monthly cost of your property for sale. This next example demonstrates this pretty well: Let´s say you are thinking of leasing AED 7,346. The landlord is quoting AED 99.17. Multiply 7.346 by 99.17 and then divide by 12 and you´ll find out that you´ll pay AED 19,007.78 each month.
2-Benefits of commercial tenants
Continuing from the last point, investors usually have problems and hesitate to get into commercial leasing. This is because commercial leasing for a property for sale can be difficult; however, it is worth the effort. Commercial tenants are more business-oriented and experienced when it comes to leasing. And even if they´re not, they usually hire professionals or attorneys to handle their lease activities.
Successful businesses tend to avoid changing locations unless it´s completely necessary or if they need more space. Getting a tenant can be really beneficial since a good tenant will ensure many years of dependable rental income and positive cash flow. Additionally, a tenant will be unwilling to move if it can´t ensure the same level of business they have in its current space.
More often than not, these tenants pay for the repairs and improvements of their property depending on the lease´s type. Since they want to have a good relationship with their customers, they also tend to take care of the properties very well. This is done to give their customers a pleasant experience.
As mentioned before, the tenants pay for the repairs depending on the type of lease. However, you might be left wondering “what are the types of leases?” There are 2 types of leases.
Rent per square foot
In this type, rent is set at AED xx. xx per square foot of the leased space. This is expressed as a monthly amount or an annual amount.
For example, if a 2200 square foot office space is quoted rent of AED 42.24 per square foot. Then the annual rental amount is 2200 x AED 42.24 = AED 92,928. Divide that amount by 12 and you get the monthly rental amount, which is AED 7,744.
Percentage Leases
A landlord can determine a base rent needed in their commercial lease calculation and have the tenant pay a percentage of its gross income. Retail sales should rise and enable their ability to pay higher rent if it is a good location. You calculate the percentage in one of two ways.
First, you can calculate the percentage over the base amount. In this case, the tenant pays minimum base monthly and adds a percentage of all gross receipts over a base amount. For example, the base rent is AED 3,670 and 5% of the gross receipts over AED 183,500. Using a month´s gross receipt of AED 264240, the calculation would be like this:
- The month’s gross receipts of AED 264,240 – 5% of the month´s gross receipts of AED 183,500 = AED 80,740
- Previous result of AED 80,740 x the percentage (5%) 0.05 = AED 4,037
- Previous result of AED 4,037 + base rent of AED 3,670 = AED 7,707 which is the monthly rental amount.
On the other hand, you can also calculate the percentage lease with the percentage of gross receipts.With this method, the tenant pays rent on all gross receipts from zero. For example, the tenant pays AED 1,835 per month on base rent. Alongside this, they pay 2% of gross business receipts. Also using a month´s gross receipt of AED 264,240, the calculation would be like this:
- AED 264,240 x 0.02 (2%) = AED 5,284.8
- AED 5,284.8 + base monthly rent of AED 1,835 = AED 7,119.8 which is the monthly rental amount
3-How to negotiate rent with your new or existing tenant
With a good approach, you can avoid any stressful process regarding a lease negotiation. If you know your local market, then you know which units cost less or more than yours. By having your rent in line with market value, you´ll be able to raise the rent in your tenant without risking them leaving.
Most renters like to stay in the same neighborhood which means that once they do their research they´ll see units with the same or higher rates. If the rent for your new unit is close to the average price of a similar unit, your tenants will still feel they´re getting a good deal. This will increase the chances of them accepting a rent increase without complaining.
4-What is an ROI
Now that you know the basics of how to calculate the monthly rent of your property for sale,you´ll need to know what an ROI is. A Return on Investment (ROI) is, in a few words, a mathematical formula. This formula is used by investors to evaluate the property they invested in, and determine how well has it performed.
An ROI calculation is used by enterprises with other methods to develop a business case for any given proposal. An enterprise uses the overall ROI as a way to grade how well it is managed. If the enterprise has immediate objectives an ROI can be measured in terms of meeting one of those objectives. They focus on completing those objectives rather than getting immediate profit.
In addition to this, enterprises also use ROI to gauge different metrics. These metrics help determine how much profit does a business make. To calculate it efficiently, they measure total returns and total costs.
In conclusion, if an ROI has a positive return percentage, this means that the business is profitable. On the other hand, a negative return percentage on an ROI means that the business owes more money than what they gain. Simply put, if the percentage is positive the returns exceed the total cost. If it´s negative, then the investment generates a loss.
5-How to calculate estimated/potential ROI on your rental property
As the previous point mentioned, an ROI is the measure that businesses use to calculate how profitable the investment is. Nevertheless, you might make yourself the question “how can I calculate the estimated ROI for my property for sale?”
When you calculate the ROI of your property for sale,you need to consider your upfront expenses and recurring expenses. An upfront expense is an initial sum of money owed in a purchase. On the other hand, recurring expenses are ongoing expenses like rent, salary payments, mortgage payments, etc. It´s beneficial for you to have an initial investment checklist, it should have:
- Down payment.
- Interest rate.
- Closing costs.
- Necessary improvements for the property on sale.
There are also some things you should take into account to calculate your ROI. These are the expenses and market rents.
Expenses
You shouldn´t set your property for sale´s rent based on your expenses. Instead, it´s recommended for you to do some research and find the rent of other properties in your area. After that, calculate the rent of your property accordingly to those rents. You´ll also need to know to take supply and demand into account to calculate the rent. When there is a high demand for properties in your area, their prices tend to go up.
You´ll get an idea of how much will the rent be if the property is already rented. Otherwise, you´ll need to use market rents to estimate the approximate monthly rent. Once you have an estimate of your annual income, you can calculate your ROI. Investors calculate it by deducting your property´s annual expenses, which they can do on paper or in an Excel spreadsheet.
The process to calculate your ROI can be summarized in 4 simple steps:
- Calculate the annual income of your property for sale.
- Find your cash flow. You do this when you subtract your expenses from your annual income.
- Determine your net income. To do this, add your equity build to your cash flow.
- Divide your net income by your total investment. This way you´ll calculate the ROI for your property on sale.
6-What is a good ROI for a rental property?
After dividing your net annual income by the cost of the initial investment, you can calculate your ROI. By expressing the result as a percentage, you´ll be able to determine if you have a good deal in your hands or not. If you want a good ROI for your property for sale, you should have a return of at least 4-10%. Otherwise, it won´t be a reasonable deal for your property.
A Rental on Investment of less than 4% is, usually, not worth the investment. This is generally the case unless there are factors beyond just numbers that make the property valuable. On the other hand, a Rental on Investment of 10% or more is commonly seen as a good deal. If you use realistic conservative numbers you´ll be able to have a more reasonable view of the ROI of the property for sale.
You also need to take into account the risk of low-end properties. They will often look promising on paper in comparison to mid-range or high-end properties. However, as mentioned before, they´re a risk since they can have more tenant turnovers and higher repair costs. The key factor is to estimate higher vacancies and their repair costs. This way, you´ll be able to have a better picture of your ROI and won´t be disappointed with your initial results.
Since rental markets vary between cities and neighborhoods, stacking your property against other comparable properties can be beneficial. It tells you if the predicted ROI measures are returned in a particular market.
7-How can Connect Property help you estimate the monthly rate of your commercial property
Calculating the monthly rate of your company can be a difficult and tedious task to do, so it is better for you to do it alongside a company. Connect Property is your best choice for a company. With over 20 years of experience on the market, we´ll help you calculate the monthly rates of your property for sale. Let us work for you and help you solve any tedious issues.
Would you like to know more about the monthly rates or ROI of commercial properties? Call us at +971 43316688 or send an email to contact@connectproperty.ae and you’ll talk to one of our representatives that will gladly answer all of your questions.
