Carrying Costs in Commercial Real Estate
Understand how this one key concept will impact your ROI for your next commercial real estate investment.
When you’re evaluating a new investment opportunity, it’s natural to first look at the potential return on investment. But before you commit your money to a new deal, you should first consider how the sponsor has calculated numbers like the ROI and property value.
In particular, you should always consider the carrying costs associated with investing in a commercial property.
What are Carrying Costs?
Carrying costs, also called holding costs, are any and all expenses that an investor will have to pay while owning a real estate property. For commercial real estate, these may include:
- Insurance premiums
- Maintenance costs
- Marketing costs
- Property management fees
- Property taxes
It’s important to get a full picture of a property’s carrying costs before you invest, as the amount of expenses you’re responsible for will directly impact both the property’s cap rate and your expected ROI.
Who Pays the Operating Expenses for a Commercial Property?
One of the most effective ways to decrease carrying costs for a real estate investor is by negotiating a net lease with the property’s tenants.
Net leases may be structured as single, double, or triple net, which refers to the expenses a tenant is responsible for. In a single net lease, for example, the tenant pays only the property taxes in addition to their base rent, and is not responsible for insurance or maintenance fees.
In a triple net lease — which is the most popular type of net lease — tenants pay the base rent, property taxes, and insurance costs, along with all property maintenance fees. This frees the real estate investor from paying for any of these carrying costs.
Keep in mind that lower carrying costs do not correlate 1:1 with a higher return on investment. In many cases, a triple net lease structure allows tenants to pay a lower base rent to compensate for the extra costs they’ll take on.
However, triple net leases also provide other advantages like consistency and reliability. And since they’re often long-term agreements, triple net leases give investors the potential to see their property appreciate in value over time.
Find a Trusted Partner
Estimating carrying costs, negotiating leases, and understanding how these things affect a property’s valuation can get complicated quickly, even for the experienced real estate investor.
That’s why many people choose to work with an experienced sponsor, who can handle all the heavy lifting at each stage of the investment process.
At Excelsior Capital, we’ve seen time and time again how investing in commercial real estate assets in healthy secondary markets — especially properties in stable asset classes — can deliver consistently strong results for our investors. We also have the experience needed to structure leases that are both appealing to prospective tenants but also efficient for our investors.
To learn more about Excelsior Capital and our direct co-investment opportunities, please fill out this brief form to get in touch with a member of our team.
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