Commercial Real Estate Investing Terms
Capitalization Rate: Also known as Cap Rate is your net operating income divided by the sales price. It's measure of profitability of an investment property. Cap rates tell you how much you would make on a investment if you paid all cash for it; financing and taxations are not included: Cap Rate = Net operating income /sales price.
Cash Flow: Your annual cash flow is net operating income minus debt service. You can also figure monthly cash flow by dividing your annual cash flow by 12; Annual cash flow =net operating income - debt service, Monthly Cash flow = annual cash flow /12
Cash on cash return:
Cash on cash return: To find out your cash on cash return, divide your annual cash flow by down payment amount; Cash on Cash return = annual cash flow / downpayment.
Debt service: Debt Service is calculated by multiplying your monthly mortgage amount by 12 months; Debt service = monthly mortgage amount X 12
Effective gross income:
Effective gross income: You can find your effective gross income by subtracting vacancy from gross income; Effective gross income = income -(vacancy rate% X income)
Gross income: Gross income is all of your income, including rent, laundry or vending machine income, and late fees. It can be monthly or annual.
Net Operating Income:
Net Operating Income: Aka (NOI) Your net operating income is your effective gross income minus operating expenses; NOI = effective gross income - operating expenses.
Operating expenses: Your annual operating expenses of the property typically include taxes, insurance, utilities, management fees, payroll, landscaping, maintenance, supplies and repairs. This category doesn't include mortgage payments or interest expense.
Vacancy: A vacancy is any unit that's left unoccupied and isn't producing income. A unit that's vacated and rented in the same month isn't considered a vacancy it's considered a turnover. Vacancy rate = number of vacancies / number of units.