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Vacancy Costs and Opportunity Costs in Commercial Real Estate

[fa icon="calendar"] 02.21.2017 / by David Lee

 

Every real estate professional should have a firm grasp on the different costs associated with their investments. Two of the major costs you will need to be aware of when purchasing commercial real estate are the vacancy cost and the opportunity cost. In this post, we will look at how these two costs can affect your investment.

What is a Vacancy Cost?

When you have a vacant unit in your property, you are missing out on valuable revenue each month that it remains vacant. This is referred to as a vacancy cost. If you are thinking about purchasing an investment property, you should have a financial plan in place which will account for vacancy cost.

How Do Vacancy Costs Affect Cash Flow?

Commercial property owners must make it a priority to keep as many units occupied as possible. When you become aware that a property is about to be vacated, use your prior vacancy cost planning and begin to formulate a plan for occupancy.

Vacancies should be marketed at least 60 days ahead of time to cut down on the amount of time they will remain empty. Therefore, if you know the tenant will be leaving in a month or two, start exploring different channels and forming a game plan for how you will get the property move-in ready for the next tenant.

What is an Opportunity Cost?

Buying a property has significantly larger upfront costs than leasing a property does because of the size of the down payment required. This is referred to as the opportunity cost and can be defined as “The lost earning potential on your down payment.” In other words, it is what you could have made by investing your money elsewhere.

An example of an opportunity cost is this: if you were to put $100,000 down on a property, you would no longer receive interest payments on that $100,000.

How Does Opportunity Cost Affect Cash Flow?

Opportunity cost translates into the amount of money you will lose or are unable to gain because your funds are tied up and unavailable for other investments. For example, putting a down payment on a commercial property could prevent you from investing in stocks or bonds that may generate future profits.

This doesn’t mean that real estate investors should focus on short-term investments, it just means that it is important to understand the impact time will have. Factoring this into your investment analysis is crucial for long-term success.

Know The Cost

Real estate investors need to be aware of the different costs associated with their investment in order to be successful. Understanding how vacancy costs and opportunity costs can affect your investment is imperative.

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Topics: Commercial Real Estate

David Lee

Written by David Lee

David Lee is the Director of Leasing & Brokerage at Demetree Real Estate Services. David came to our team with 31 years of commercial real estate brokerage experience in the Central Florida area.