Investment property is a property that has been purchased with the intention of earning a return on the investment, either through rent, the future resale of the property, or both. An investment property can be a long-term endeavor, such as an apartment building, or an intended short-term investment such as flipping.
The basic elements of an investment are cash inflows, outflows, timing of cash flows, and risk. The ability to analyze these elements is key in providing services to investors in commercial real estate.
Cash inflows and outflows are the money that is put into, or received from, the property including the original purchase cost and sale revenue over the entire life of the investment.
Cash inflows include the following:
- Operating expense recoveries
- Proceeds from sale
- Tax Benefits
- Tax credits
Cash outflows include:
- Initial investment (down payment)
- All operating expenses and taxes
- Debt service (mortgage payment)
- Capital expenses and tenant leasing costs
- Sale costs
The timing of cash inflows and outflows is important to know in order to project periods of positive and negative cash flows. Risk is dependent on market conditions, current tenants, and the likelihood that they will renew their leases year‐over‐year.