Buying commercial property for sale through reputed real estate companies in Sri Lanka can be quite a lucrative investment. Returns from commercial real estate can vary widely depending on several factors, including the type of property, location, market conditions, and the investor's strategy. Here are some common ways to earn returns from commercial real estate:

• Rental Income: One of the primary sources of returns from commercial real estate is rental income. Commercial property owners earn money by leasing space to businesses or tenants, such as buying a luxury house for sale in Kandy and renting it to a tourist business. The amount of rental income depends on factors such as property type (office, retail, industrial, etc.), location, lease terms, and demand for the space. Typically, rental income is expressed as a percentage of the property's market value (e.g., cap rate) or as a dollar amount per square foot.
• Capital Appreciation: Commercial real estate properties can appreciate in value over time, leading to capital gains when the property is sold. Appreciation is influenced by factors like location, property condition, improvements made, and overall market trends. Some investors buy properties with the expectation that their value will increase over time, allowing them to sell at a profit.
• Cash Flow: Cash flow is the difference between rental income and operating expenses, including property management, maintenance, taxes, and financing costs. Positive cash flow means the property generates more income than it costs to operate, while negative cash flow means the opposite. Investors often seek positive cash flow to cover expenses and provide a steady income stream.
• Tax Benefits: Commercial real estate offers several tax advantages, including depreciation deductions, interest deductions on loans, and the ability to defer capital gains taxes through 1031 exchanges. These tax benefits can enhance overall returns.
• Equity Build-up: As the property's mortgage is paid down, the owner's equity in the property increases. Over time, this equity build-up can be a significant source of wealth, as it can be accessed through refinancing or selling the property.
• Leverage: Many investors use leverage (borrowed money) to acquire commercial real estate. By using leverage, they can amplify returns, as long as the property's income and appreciation exceed the costs of borrowing.
• Value-Add Strategies: Some investors focus on value-add strategies, where they purchase properties with the intention of making improvements, increasing rental rates, and boosting property value. These strategies can result in substantial returns if executed successfully.
• Diversification: Commercial real estate can serve as a diversification tool in an investment portfolio. It may offer returns that do not necessarily correlate with other asset classes, such as stocks and bonds, providing a hedge against market volatility.

It is important to note that commercial real estate investments also come with risks, including market fluctuations, economic downturns, tenant vacancies, and property management challenges. The potential returns from commercial real estate can vary widely, and investors should carefully assess these factors and conduct thorough due diligence before making investment decisions. Additionally, working with experienced real estate professionals can be beneficial in navigating the complexities of commercial real estate investments.

How do you calculate your average return from commercial real estate?

Calculating your average return from commercial real estate typically involves considering the various sources of return and then determining an overall performance metric. The key components to include in this calculation are rental income, capital appreciation, and expenses. Here is a step-by-step guide on how to calculate your average return from commercial real estate:

• Calculate Rental Income: a. Determine your total annual rental income, which is the income generated from leasing out your commercial property to tenants. b. Subtract any vacancy losses or uncollected rent to get your effective rental income. Effective rental income is the income you actually receive after accounting for vacancies and unpaid rent.
• Calculate Operating Expenses: a. Add up all the operating expenses associated with the property. This includes property management fees, maintenance costs, property taxes, insurance, utilities, and any other expenses related to property upkeep and management. b. Subtract these operating expenses from your effective rental income to calculate your annual net operating income (NOI). NOI represents the property's income after covering operating expenses but before accounting for financing costs.
• Calculate Financing Costs: a. If you have a mortgage or other financing in place, determine your annual interest expense and principal repayment. b. Subtract these financing costs from your NOI to calculate your pre-tax cash flow. Pre-tax cash flow is the amount of money you have left over after covering both operating expenses and financing costs.
• Calculate Capital Appreciation: a. Determine the change in the property's market value over a specific time period (usually annually). b. Calculate the percentage change in value by dividing the change in value by the property's initial value. c. Add this percentage change in value to your pre-tax cash flow. This represents the overall return from capital appreciation.
• Calculate Total Return: a. Sum your pre-tax cash flow and the return from capital appreciation to obtain your total return for the year.
• Calculate Average Return: a. To calculate your average return over a specific period, such as the entire holding period of your investment, add up the annual returns (total return for each year) and divide by the number of years.

This average return provides a snapshot of your investment's performance over the specified period, taking into account rental income, capital appreciation, operating expenses, and financing costs. Keep in mind that this calculation does not consider taxes, property management fees, or other specific details of your investment, so it is essential to analyse all aspects of your investment for a comprehensive assessment of performance.