Welcome to the list of the top 10 terms used in commercial/investment real estate. If you are thinking of getting into investing and/or commercial real estate. It will help to familiarize yourself with these terms as they are used frequently in the field.
The following is a summary. Click on the terms to get examples and more detailed definitions.
1. Gross Income $
Gross income is all of the income that you make on a property. This includes rent, laundry, storage fees, late fees, vending machines, etc.
2. Vacancy $
Any unit that is not occupied and not producing income is considered a Vacancy. Keep in mind that if a unit changes tenants in the same month, it is considered a turnover, not a vacancy.
3. Vacancy Rate %
This is the number of vacancies divided by the total number of units.
4. Effective Gross Income $
Effective gross income is a number that takes into account what you will be making with vacancies.
Income - (Vacancy Rate (%) x Income) = Effective Gross Income
5. Operating Expenses $
The total annual expenses of an investment; including taxes, insurance, utilities, management fees, landscaping, maintenance, repairs, and advertising.
6. Net Operating Income (NOI) $
To get the NOI, take the Gross Income and subtract it by the Operating Expenses.
Effective Gross Income - Operating Expenses = NOI
7. Debt Service $
Debt Service is the annual cost of your mortgage.
Monthly Mortgage Amount x 12 = Debt Service
8. Cash Flow $
Most buy and hold real estate investors agree that cash flow is the ultimate goal. To calculate cash flow, you take the NOI and subtract it by the Debt Service.
NOI - Debt Service = Annual Cash Flow
9. Cash-on-Cash Return %
Cash-on-Cash Return is what you would use to compare your investment to other types of investments, like stocks. To calculate Cash-on-Cash Return, take the Annual Cash flow and divide it by the Down Payment amount.
Annual Cash Flow
10. Capitalization Rate %
AKA Cap Rate, shows how well the investment performs if you pay all cash. To calculate a Cap Rate, you take the Net Operating Income and divide it by the Sales Price.
Source: Commercial Real Estate for Beginners: The Basics of Commercial Real Estate Investing. By Peter Harris