Maximizing ROI in Pharmacy Real Estate: A Comprehensive Guide
Investing in pharmacy real estate can be a superb way for investors to generate wealth and earn a steady income. In a variety of ways, it is a more favorable investment vehicle than other types of commercial properties and the stock market.
Pharmacy real estate investments are typically single-tenant net-lease properties. They boast investor-friendly lease structures whereby tenants pay costs such as insurance, property taxes, utilities, maintenance, and repairs. This can be particularly beneficial for investors, as interest rates on business loans have reached double digits.
However, pharmacy real estate managers and investors have to strategize to get maximum returns. Here are decisive ways to boost your return on investment (ROI) on drugstore real estate.
What Is Pharmacy Real Estate ROI?
ROI is a vital real estate, particularly pharmacy properties, investment metric. It measures the yield that you get from your pharmacy real estate investments.
Real estate ROI involves calculating how much money was made compared to the amount of money invested. A positive ROI on a drugstore property means that it earns more than its upfront and ongoing costs. Alternatively, a negative ROI results when the pharmacy property costs more to own than it earns.
Factors that affect ROI include the quality and costs of real estate management, financing options, location, and the condition of the pharmacy property.
Therefore, it is crucial to consider all of these factors from the start. Most forward-thinking investors optimize ROI through long-term holding, strategic buying, and keen research.
How to Find Your Pharmacy Real Estate ROI
ROI is a profitability metric for evaluating most real estate purchases, including pharmacy property investments. However, finding an ROI in pharmacy real estate is sometimes more complex than other investments.
Here are the steps:
Step 1: Calculate the total costs of your pharmacy real estate investment.
The total costs encompass all of the expenses associated with purchasing and getting your pharmacy property up and running. These are mostly upfront costs of investments: purchase price, renovations, repairs, and any initial upgrades. Other costs include financing and associated expenses like closing costs and interest.
Step 2: Determine your investment’s net operating income.
Net operating income (NOI) refers to the rent and other income sources minus operating costs (property management fees, insurance, and property taxes).
NOI essentially is the remaining income after operating expenses have been deducted from the gross income (which includes rent) from pharmacy tenants like Walgreens, Rite Aid, or CVS. For example, a Walgreens for sale by Pharma Property Group in Bellflower, CA, has a respectable annual NOI of $378,000.
Step 3: Determine your pharmacy’s real estate ROI.
To calculate your pharmacy property’s ROI, use the formula shown below:
ROI = (NOI / Total Investment Costs) x 100%
To illustrate, if your property’s total investment costs are $600k and the net operating income is $60k, then the ROI would be 60,000/600,000 x 100 = 10%.
Step 4: Consider the drugstore property’s holding period.
ROI is a reliable measure for short-term real estate investments. But most pharmacy property investments are long-term. This is when the internal rate of return (IRR) is used as a measurement.
Most pharmacy real estate investments carry a holding period of 20+ years. IRR provides a clearer view, as it takes into consideration the time value of cash flow and money over this period.
Cash flow is another indicator to consider. It is the money that remains after you have paid all of the expenses on your investment. A positive cash flow indicates more income than expenses.
Additionally, property appreciation potential can reflect its investment health. It measures the increase in the value of your property over a specific period. Factors such as inflation, local market changes, and property upgrades can help increase the appreciation potential of your property.
How to Increase Your Pharmacy Real Estate ROI
Invest in the least expensive pharmacy properties.
If you are looking to maximize your ROI, one approach is to purchase the least expensive but most valuable investment properties. The single biggest determinant of ROI is the property’s purchase price and all the debts and fees associated with it.
As an investor, it is crucial to understand the local market, including the average returns of comparable properties in the area. Conducting due diligence will help you find an asset with excellent potential for a higher return over time.
Be aware that while some pharmacies may cost less, they may also require significant repairs and renovations. However, with the right purchase price, these investments could increase property value and ROI, too, making the investment worthwhile.
Invest in technological improvements.
Installing smart technology solutions throughout the building can lower energy costs, eliminate expensive repairs, and raise the property’s value. These innovative technologies can reduce overall expenses and increase long-term ROI.
A newer pharmacy property that requires fewer updates and maintenance may carry a higher purchase price but also has lower expenses, making it a viable potential option.
Reduce annual costs.
Reducing annual costs can significantly improve your pharmacy’s real estate ROI. Evaluate your property’s overall expenses, from interest on debt payments to property management costs, and decide in which areas you can cut costs. Installing technology or hiring an efficient property management team can reduce expenses and increase profit over time, providing a more significant ROI.
Investors who already own property can also consider refinancing to lower their annual costs, thus boosting their ROI.
Consider the pharmacy tenant’s long-term financial standing and performance.
It is advisable to assess the long-term performance and financial standing of pharmacy tenants, as a pharmacy closure due to non-performance could undermine your investment. As a rule of thumb, it is best to invest in big, legacy drugstore properties.
Standard & Poor’s Global Ratings has already affirmed both CVS Health and Walgreens Boots Alliance at BBB with positive and stable outlooks, respectively.
Conclusion
Pharmacy real estate ROI is a leading metric that considers the property’s total costs and net operating income to measure its yields. You can maximize your ROI by purchasing valuable but less expensive investment assets, investing in technology improvements, and reducing annual costs. Finding the right asset requires thorough due diligence to locate properties with excellent potential for a higher ROI over time.
