Cap Rates for Commercial Investment

Understanding Cap Rates for Commercial Investment
Capitalization rates, or cap rates, are one of many tools that investors can use to compare properties.

The cap rate is an important figure in the mathematical formula used to determine the rate of return on a specific property that is purchased outright. This isn’t the same as the rate of return on an investment that is financed.

By dividing the net operating income (NOI) by the current market value, we arrive at the rate of capitalization. For example, if Property A has a net operating income of $100,000, and the current market value of the property is $1,800,000, then the cap rate = 5.5%.

This would represent the percentage return an investor would receive for a full cash deal on that property. This is a simplified formula, and many investors include estimates of operating expenses and vacancy rates in order to give themselves a more detailed financial picture of the potential investment.

Although useful when comparing similar properties, the cap rate alone shouldn’t be used as the deciding factor when evaluating a property.

A higher cap rate usually indicates that there is an assumption of greater levels of risk for that investment. Each investor must closely adhere to his or her own investment principles when selecting a property.

The cap rate can also be useful in tracking investment performance over time. For an investment to remain profitable, the NOI needs to increase at a rate that is greater than or equal to the increase in the property value. If the cap rate declines, it may be best to sell.

Are You Using the Vocabulary of Success?

When it comes to opening doors, closing sales, and clinching negotiations, certain words and expressions are significantly more effective than others. Top executives and salespeople choose their words and phrases carefully to overcome resistance and persuade listeners.

For example, it’s well known that people like hearing their own names. Influencers also understand that people don’t like getting long answers to simple questions. Long answers evoke uncertainty and suggest that the speaker is hedging or fibbing.

On the other hand, phrases like definitely, certainly, or we can do that sound authoritative and trustworthy. Imagine is another effective word that prompts listeners to conceptualize a good opportunity or a positive outcome. Certain rhetorical questions have also been shown to help advance a discussion or sales process toward conclusion. These include the questions “Does that make sense?” and “Is that fair?”

On the other hand, data analysis indicates that certain expressions turn people off. Absolutely and perfect are overused terms that impair a speaker’s credibility. However is a waffler’s word. Listeners lose confidence and interest when they hear it. Payment: No one likes to pay; say amount instead. The term contract has negative connotations for many people. Substitute a more neutral word, like agreement. Implement and implementation suggest things are going to get complicated. Just say begin or get started.

Ultimately, using simple, clear, and effective words and phrases – and avoiding bombast – is the best way to convince people of your position or the virtues of your products and services.

Five Secrets to Earning Customer Loyalty

A loyalty program is a great way to interact meaningfully with your customers. But coupons, discounts, and special sales don’t engender loyalty. Successful loyalty programs engage with program members beyond mere purchase transactions and require continuous, intentional, strategic care. The components of a good loyalty program are many and varied, but five elements are essential:

Trust: Enduring relationships are underpinned by trust, and customer trust is more important now than ever, due to consumers’ access to a world of choices. To create a loyalty program built on trust, make it simple, fair, and straightforward. It should deliver what is promised.

Customization: Once trust is established, customers want to know you “get them.” A good loyalty program provides access or choices based on each customer’s tastes, desires, and previous buying patterns. Technology gives even small businesses the ability to customize and enhance the loyalty experience.

Experience: A customer’s experience with your loyalty program should be based on distinctive content and compelling context. The demand for fresh, relevant, meaningful experiences is growing, and the bar is continually hoisted higher as the competition grows and those competitors innovate.

Purpose: The need for meaning and purpose drives behavior in many aspects of life, including purchasing behavior. Loyalty programs that help consumers get fit or maintain their good health, celebrate an occasion, meet a goal, benefit a worthy cause, or make the world a better place build trust, reinforce loyalty, and help satisfy this basic human need.

Appreciation: A successful loyalty program is a reciprocal relationship that lets consumers know they are seen, heard, and valued, and that their business is always appreciated.

Build a loyalty program on these foundational factors, and you’ll reap the benefits of a loyal customer base.

Top Three Things to Consider When Negotiating a Retail Lease
Opening a retail outlet is an ambitious, competitive, and costly endeavor.

The capital outlay includes branding, hiring employees, installing fixtures, purchasing stock, and finding that ideal space to showcase your business.

With these expenses in mind, it’s easy to see why many retail entrepreneurs start out leasing the space for their business to minimize their initial capital outlay.

If you’re in this group of leasing entrepreneurs, it’s important to gain a good understanding of your options before entering an agreement.

Keep in mind that negotiating a commercial lease can be a complex process that can seem overwhelming.

However, careful consideration of the following three areas will help you as you go through the process of lease negotiations.

Learn the types of leases available. First and foremost, you must understand the type of lease you are signing. It is important to know the differences between lease types, as there are pros and cons to each. With gross leases, you typically pay a single amount to the landlord, which covers the base rent plus utilities, property taxes, insurance, maintenance, and expenses for common areas. There are two commonly used types of gross leases, known as gross rent leases and modified gross leases.

Net leases, on the other hand, can often result in a lower rent payment to the landlord. However, these leases make the tenant responsible for fluctuating incidental costs such as utilities, maintenance, and, in some instances, lease operating costs. The three main types of net leases are known as net lease, double net lease, and triple net lease.

A third type of lease is known as a percentage rent lease. This type is common in malls and other multi-tenant properties. With a percentage rent lease, you pay the landlord a base rent plus an agreed-upon percentage of your gross sales.

Carefully consider the lease term. Tenants can often obtain a more favorable base rent rate with a longer lease term.

However, if you are a start-up, it may not be feasible to sign a multiyear lease, because the needs of your retail business may change sooner than anticipated.

You may be able to increase your negotiating position by asking for renewal terms with set rent increases, favorable termination penalties, and subleasing options up front.

Define responsibilities of the tenant and landlord. Regardless of which type of lease you and the landlord agree upon, the lease agreement should clearly define the responsibilities of each party. Landlords may offer tenants incentives in the form of modifications to the space to attract the best tenants in a highly competitive market.

It will be important to clearly outline who is responsible for the maintenance of those modifications during the lease term, and who is responsible for removal of any modifications upon termination of the lease. Furthermore, retail spaces tend to be in multi-unit buildings with common areas both inside and outside the building envelope.

Which party is responsible for the maintenance of those common areas, and when, should be clearly outlined in the agreement during the negotiation process.

SA Realty Watch Group
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Closing the Deal
You’ve worked hard to make the appointment, woo the customer, and make your pitch. Now what? How do you make the move from selling to sold? Use the following resources to strengthen your methods and close more deals:

Ever wish there was a simple formula for closing more sales? Here’s one:
The Simple Formula For Closing More Sales In Your Business

A secret to closing the deal is closing the trust gap. Here are five ways to fill it:
5 Ways To Close Your Next Big Sale

Are your current methods ineffective? Try these unconventional tactics:
3 Unconventional Sales Tactics That Will Close More Deals

Closing phrases are key to sealing the deal. Consider adding these effective phrases to your repertoire:
18 Closing Phrases To Seal a Sales Deal

Different situations require different closing techniques. Learn about a variety of methods here:
How to Sell – Closing the deal

This newsletter and any information contained herein are intended for general informational purposes only and should not be construed as legal, financial or medical advice. The publisher takes great efforts to ensure the accuracy of information contained in this newsletter. However, we will not be responsible at any time for any errors or omissions or any damages, howsoever caused, that result from its use. Seek competent professional advice and/or legal counsel with respect to any matter discussed or published in this newsletter.
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