is the 1% rule applicable to commercial properties?

Question

H. Jack Miller · Answer

I wish it was that easy in residential or commercial. You really need to focus on the expenses and NOI even in SFD investments. Example you could have one city with low taxes and one with high taxes. We focus on NOI

Jonathan R McLaughlin · Answer

look carefully at downside risk and upside...creditworthiness of tenant, likelihood of replacement if they leave since vacancies can be long, surrounding options for businesses to relocate etc. Capex, since lots of NNN properties have landlord roof and structure or something similar. Check for rent increases in the lease...are they annual or at the end of X years? Are they tied to CPI? How valuable is the dirt without the building?

I mean, the NOI on a particular property can be great, but if its got 3 years left on the lease from a struggling tenant and needs HVAC replacements of $250K its maybe a worse bet than one with 10 years on the lease with a fortune 1000 tenant and a lower NOI.

Michael Ganovski · Answer

Thank you for this. So when you look at NOI, as a percentage, how do you use that in evaluating  an assessment asa good deal or not? Are use my million dollar investment once again as a barometer, is an NOI of $100,000 good, week, or Soso?  I recently was presented with a $375,000 asset and an NOI of $29,000. That is a little less than 10% of the investment. What I’m trying to understand is my best use of capital. Than’s again for discussion

Ronald Rohde · Answer

No, there can be some GRM, or per unit basis, but that has to only be for multi family within a tight niche.

Commercial is very broad and NOI is the only thing that remains constant as a comparison tool.

Michael K Gallagher · Answer

Hey @Michael Ganovski I don't think it applies as nicely.  There is really no other way around looking at NOI in commercial in my mind.  the world of commercial also changes so much form asset class to asset class.  There very well could be a sector that sees the possibility of a 1% rule, but there are just so many variables in a commercial transaction and deal to take into account I doubt there is a quick check as clean as a 1% rule.  you might be able to pair it down and do like a "cost per square foot vs revenue per sf" and do a 1% rule that way...it might take some of the variables out of it.

is the 1% rule applicable to commercial properties?

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