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Calculating Your Overall Return on a CRE Investment

The ROI of the commercial real estate requires a little math due diligence

Anyone involved in real estate investment, from the entrepreneurial veteran to the newbie looking to get into the game, has a common question at the start of the process: What will be the return on my investment? That is, after all, the reason people get involved with investment properties in the first place.

To reach the bottom line answer to the bottom line question, there are two rate-of-return calculations worth exploring. While one is simple and the other complex, they both provide the guideline to help investors determine their next move.

The basics of cash-on-cash

For most entrepreneurial investors, the cash-on-cash calculation is the way to go. It’s simple and provides an easy-to-understand cash flow outcome. In basic terms, cash-on-cash means subtracting expenses and debt services from gross income. The answer is the annual return.

Using a potato chip analogy, if I throw a bowl of potato chips into an investment, I need to know how many potato chips will be thrown off in a year for a rate of return for that investment.

In dollars and cents terms, the annual amount earned from an investment ($6,000) is divided by the amount of the initial investment ($100,000). The answer is then multiplied by 100 to get the cash-on-cash rate of return (6%).

The complexities of an internal rate of return

The internal rate of return formula adds a complex spin to the calculations. In essence, the formula looks at the net present value of either the negative or positive cash flow that comes out of a specific property. If the internal rate of return is higher than your floor number, then it’s a good investment. If it’s below, then that is not an investment you should be making.

While that certainly seems logical, the formula grows in complexity because it uses an assortment of variables, such as depreciation and appreciation. Because some of these variables change with time and other outside forces, they cannot be firmly defined with a consistent number value. As a result, the internal rate of return cannot be calculated analytically and is instead achieved through trial and error or computer software.

This doesn’t go to say, however, that the internal rate of return doesn’t have a place in real estate investment. Using this formula is especially valuable when determining if a property should begin a new operation or whether it should expand/upgrade an existing one.

Understanding the bottom line in South Florida

To help navigate the ups and downs of real estate investment, it’s always a good idea to work with a team skilled in both rates of return calculations, available properties, and client needs. Morris Southeast Group is able to provide the professional guidance you need before, during, and after you make your investment.

For a free consultation or to learn more about our property management, investment opportunities, and/or other services, call Morris Southeast Group at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

What Cannabis Can Do for South Florida CRE

What Cannabis Can Do for South Florida CRE on morrissegroup.com

A green revolution is on the horizon

In 2016, Florida voters passed a measure to legalize medical marijuana. Ever since that same measure has been locked in a sort of legal limbo at both the state and local levels. Back-and-forth lawsuits in Tallahassee have resulted in delays, go-ahead, and more delays, while some local communities have passed moratoriums and bans on the location of growing facilities and dispensaries.

Despite these growing pains, one thing is certain: medical marijuana is profitable. In 2016, legal cannabis sales reached $6.7 billion. This number is expected to jump to $20 billion by 2021. For commercial real estate, particularly in South Florida, those numbers are just too big to ignore.

Light industrial space is a natural location

At the moment, legally-grown cannabis cannot be transported across state lines. As a result, states with approved medical marijuana initiatives must grow their cannabis locally – and the real estate that is most suitable for doing so are warehouses zoned for light industrial.

Generally speaking, these spaces are large enough to be converted to meet various growing needs (growing and processing plants, producing edibles, and distilling oils), ventilation, moisture controls, and lighting.

While conversions can run in the millions of dollars, the result will be profitable. One only has to look at Denver and other areas where the medical marijuana industry is fully operational. There, lease prices for vacant warehouses that couldn’t be given away pre-pot have jumped more than 50% in just a few years.

Owning is more than a pipe dream

Investors looking to get into the medical marijuana business are just one part of the CRE equation. The other participants are the grower entrepreneurs looking to own their spaces. In Denver, for example, many growers soon learned that skyrocketing rents could quickly put them out of business. In fact, many growers seem to have taken a page from lessons learned from Wynwood artists and gallery operators who quickly learned that owning their own space put them in charge of their profits.

At the same time, legal cannabis markets have seen a sort of offshoot to the CRE boom: investors who also get a grower’s license. Once the warehouse conversion is complete and the business is up and growing, the investors then sell the entire operation.

Issues that are unique to the medical marijuana business

In addition to an inability to transport crops and products across state lines due to Federal regulations, there are other issues that are especially unique to the growing business.

At the moment, it’s impossible for those in the legal cannabis trade to receive bank loans. The result is that financial transactions – from rents to purchases – are cash only.

Similarly, cash earned through medical marijuana requires banks to do more compliance work, which means higher account fees. Investors and entrepreneurs, then, tend to look for other venues in which to invest their money – and the short answer is often more industrial, commercial, and residential real estate. In other regions of the country, for example, residential neighborhoods have seen home values skyrocket because of medical marijuana.

Catching the buzz in South Florida

Two years after Florida voters approved the medical marijuana measure, the state and various municipalities are still in a range of stages. Miami, for example, opened its first dispensary in April 2017, while it took until January 2018 for Broward County to approve dispensaries, which can only be located in unincorporated regions of the county. (Critics believe this relegates dispensaries to low-income, high-crime, predominantly black neighborhoods, while advocates maintain this measure will breathe new life into these communities.)

In the meantime, properties are readily available for investment, purchase, and conversion, and the entire CRE industry is waiting for a firmer understanding of local zoning restrictions and statewide regulations. The team at Morris Southeast Group is ready now to help connect clients with the facilities necessary for the coming boom.

For a free consultation or to learn more about our property investment opportunities and/or other services, call Morris Southeast Group at 954.474.1776. You can also reach Ken Morris directly at 954.240.4400 or via email at kenmorris@morrissegroup.com.

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