Percentage Point Split
Now, remember the ‘rule of two’ does not work for commercial properties. When you are talking about valuations on a commercial property; the higher the rental yield, the higher the value on the property.
But how do you tell whether a commercial property is positively cash flowed or not? The difference between the income yield and cost of funds is called the ‘percentage point split’, so the difference between what your money is costing you to borrow and what that property is actually returning you, will tell you if the property is positive flowed or not.
If you have got a commercial property that returns you 10% and your cost of funds is 8%, you are making 2% on the commercial property in most circumstances, because usually the tenants pay the outgoings on the commercial property.
So, remember the difference between the ‘rule of two’ for residential and the rule of ‘percentage point split’ for commercial.
We always recommend that you seek professional advice as this blog is for general information only