Waad Nadhir has been in commercial real estate business since 1989.
The concept of return on investment or ROI is one of the most commonly used factors in evaluating real estate deals. However, this factor comes with a lot of variables and nuances.
For example, if ROI is rental income divided by the price of the building, do you measure gross income or net income? If you are talking about net income, are you looking at pre-tax or after-tax numbers? Also, do you take mortgage interest into consideration when calculating your expenses?
There are two big issues with ROI in commercial real estate investing. The first one is that there is no such thing as a generally great ROI because every investor has his own or her goals, resources and circumstances. This is why a property with an eight percent ROI can be a great deal for one investor and terrible for someone else. Secondly, ROI is just a snapshot that shows how a property is doing in the moment. It does not show or tell anything about the future.
Most beginner investors try to write down numbers on a piece of paper and work out different ratios. The problem with this approach is that they are very likely to forget something like management fees or vacancy rates that can change numbers drastically. This is why you want to create a spreadsheet that you can use every single time to get the same kind of numbers. You can also use different pieces of software that are now available on the market. This being said, it is impossible for any spreadsheet or software to tell you with absolute certainty whether you should do a deal or not. The best way to know if you should do a deal is to acquire knowledge and build extensive practical experience like Waad Nadhir did.