Analyze Return on Investment for Commercial Real Estate

A good question many new Myrtle Beach commercial real estate investors ask is “what is a good expected rate of return?”   The answer really depends on several factors, including market diversity, market saturation, the location or geography of the investment property, and market conditions in Myrtle Beach, which obviously fluctuate. All these factors should be considered because they all impact the forecasting needed to calculate the potential ROI of a commercial real estate investment.  

The easiest method used to calculate ROI is a pro forma equation. Pro forma literally means “for the sake of form” or “as a matter of form.” In the world of investing, pro forma refers to a method by which financial results are calculated. Simply put, how much can you expect to net after you’ve spent what is needed? Here’s the equation:

Expected stabilized net income / Expected acquisition and improvement costs = ROI   $100,000 / $450,000 =.22 or 22 %   Assuming your projections are correct, this is a good, solid investment. (Your average 401K, IRA or stock investment typically can be expected to yield an average return of about 5% – 8%.)  

The pro forma ROI calculation is a simple method to use and assumes the value of all money is equal, regardless of the present or future worth of the money. More advanced calculations that will value your investment over time are the Internal Rate of Return and the Net Present Value Calculation.  

Forecasting is necessary in order to work out these numbers.   Assume your initial Myrtle Beach commercial investment is $100,000, and you borrowed that from the bank at a rate of 6%.   Let’s further assume that your investment will produce $30,000 in rental income the first year and that you plan to spend all of the rental income making upgrades and advertising the property.   In the second year, you project that the rental income produced will increase to $55,000.  

Then in the third year, the amount of rental income produced increases to $85,000.   While in the fourth year, the rental income maxes out at $90,000.   Using Excel to figure the net present value (NPV) and you will see that over a period of four years your investment in this property will yield a 22% rate of return. To calculate the internal rate of return (IRR), enter the function command =IRR( and select all the cells with numerical data, in this case B2:B6.  

You can even utilize this program to compare multiple Myrtle Beach investments as a why to see which will work best for you.   As always, when it comes time to discuss your Myrtle Beach commercial real estate investment strategy with a trusted HB Springs Commercial Real Estate advisor, give us a call at 843-448-7653. We will help ensure your projections are accurate and that you’re making a smart investment.  

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