In order to thrive in the shopping center investing world you need to understand the language, there are hundreds of words you don’t use in your day to day vocabulary that are very common in the the commercial real estate investment world.
1) Cap Rate
What is a cap rate?
“Cap Rate” is the most common term used in commercial real estate – it tells you how much you make on an investment if you paid all cash.
Formula
Cap Rate = Net Operating Income / Sale Price
Example
Lets say I have a 10 unit shopping center, I bought it for $12 Million, and I net $5,000 a month from each of my tenants in rent a month ($60,000 annually). My cap rate is 5%.
Purchase Price
| Purchase Price: | $12,000,000 |
Rent Roll
| Rent (net) | Rent (net) |
| Unit 1 | $5,000 |
| Unit 2 | $5,000 |
| Unit 3 | $5,000 |
| Unit 4 | $5,000 |
| Unit 5 | $5,000 |
| Unit 6 | $5,000 |
| Unit 7 | $5,000 |
| Unit 8 | $5,000 |
| Unit 9 | $5,000 |
| Unit 10 | $5,000 |
| Total: | $60,000 |
Net Operating Income:
| Net Operating Income: | $60,000 |
The Math
Cap Rate = Net Operating Income / Sale Price
Cap Rate = $60,000 / $12,000,000
Cap Rate = 5%
2) Cash Flow
What is cash flow?
Cash flow corresponds to the amount of money you have left over after deducting all the expenses from your income each month
Formula
Cash Flow = Net Operating Income – Debt Service
Example
In the example above if my NOI is $60,000 and my mortgage is $30,000 annually – I have $30,000 of annual cashflow or $2,500 a month.
3) Cash on Cash Return
What is cash on cash return?
Cash on cash return is a rate of return ratio that calculates the total cash earned on the total cash (equity) invested in a deal
Formula
Cash on Cash Return = Annual Cash Flow / Down Payment
Example
In the example above lets say I had to put down a 20% down payment (2,400,000) my cash on cash return is
4) Debt Service
what is debt service
Debt service is the sum of interest payments and repayment of principal.
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5) Effective Gross Income
what is egi
Effective Gross Income is the potential gross rental income plus other income minus vacancy and credit costs of an investment property.
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6) Gross Income
what is gross income
Effective Gross Income is another metric used by commercial real estate investors to determine the true income from a property or portfolio.
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7) Net Operating Income
what is noi
Net operating income (NOI) is a real estate term representing a property’s gross operating income, minus its operating expenses. Calculated annually, it is useful for estimating the revenue potential of an investment property.
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8) Operating Expenses
what are operating expenses
, these are the charges associated with maintaining and running a commercial property,These include:
- Property taxes
- Property insurance
- Management and administration fees
- Common area maintenance (CAM), not including capital improvements
- Utilities, such as HVAC and electricity
- Contracted services, such as janitorial and security
- Supply costs
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9) Vacancy rate
what is vacancy rate
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Last modified: March 25, 2023
