A newspaper article recently disclosed the purchase of a trophy office building that sold for approximately $10 million, on a fully occupied property in which the tenants currently pay a combined $300,000. The frictional costs no doubt involved five-figure attorney bills, high title insurance costs, broker fees, and the other costs that are typically associated with such transactions.
The rental income from this property offers an initial capitalization rate of only 3%.
There are only three ways that this could work out.
The first two involve fundamental improvements in value.
You can make money from this base if you are an area like San Francisco, Los Angeles, Southern California in general, or parts of New York where the property has a high percentage likelihood of increasing at almost 8% annualized or higher. This was a Midwestern property where commercial properties have a twenty-year track record of 2.9% annual growth.