When it’s time to start your commercial real estate venture you might run into a few vocabulary issues. Real estate talk can sometimes transform into a whole other language and will get very confusing in you don’t understand the lingo. Don’t get stuck trying to decipher terms. Take a look at a few key metrics you need to know to keep you in the commercial property conversation.
Net Operating Income (NOI)
The NOI of a commercial real estate property is an amount that is calculated by looking at properties first year gross. You take the first year gross operating income and then subtract it from the operating expenses to get your NOI. NOTE: You always want to have a positive NOI.
Cap rate or capitalization is used to calculate the value of income-producing properties. So, if you have a real estate property with 4-units, that’s when a cap-rate might need to be known. Cap rates are used to estimate the net present value of future profits or cash flow.
Cash on Cash
If you will need to rely on financing to purchase a property then you might need to adhere to the cash-on-cash formula. Cash-on-Cash takes into account the investor does not require 100% cash to buy the property but also accounts the fact that the investor will have to use some of the NOI to make mortgage payments. Real estate investors must determine the amount required to invest to purchase the property in order to uncover cash-on-cash.