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When you first start looking into commercial real estate, it can seem like a whole new world. There are so many different terms being used and acronyms that you might feel like you need to take a crash course in this stuff before diving into it. Thankfully for you, that’s exactly what this article is for!
The cap rate is a metric that is used to determine how much you would be willing to pay for a given property based on your projected cash flow. The cap rate can be calculated in two ways, either by using a formula or by using a rent vs. value calculator. The cap rate can also be used to determine what a property is worth. In this case, you would plug in the numbers for your expected cash flow and the cap rate would tell you what someone would pay for the property. A high cap rate means that the property is bringing in lots of cash and would therefore be more expensive. A low cap rate means that the property isn’t bringing in much cash and would therefore be cheaper.
Cash flow refers to the amount of cash that a property is bringing in. In commercial real estate, cash flow is typically calculated using net operating income (NOI) and cash on cash return (COCR). Cash flow is important because it tells you how long your investment will last and how much you can expect to make off of your investment. Cash flow is useful for commercial real estate because it’s a very specific number that lets you know exactly how your property is performing. It’s a great metric for evaluating a property and comparing different properties.
Cash on cash return is a metric that is used to determine how effective an investment is. It is calculated by taking the total amount of cash flow generated by the investment and dividing it by the amount of money you put into the investment. Basically, if you put $100,000 into an investment and make $100,001 in cash flow, your cash on cash return would be 1%. You would multiply 1% by $100,000 to get $1,000. The cash on cash return is a very useful metric when comparing one investment to another.
Debt service is the amount of money that you need to pay each month on the loans that you took out to purchase the property. Debt service is important to understand because it can greatly impact your cash flow. If your cash flow comes out to $10,000 per month and you have $10,000 in debt service, you would have no money left over to use for repairs, maintenance, and property management. This is why it’s important to make sure that you have enough cash flow to cover your debt service.
The effective gross income is very similar to the gross income in that it is the total amount of money generated by a property. The main difference between the two is that effective gross income takes operating expenses into account. Therefore, the effective gross income will always be less than the gross income. You use the effective gross income when calculating the cash flow of a property to see how much money you’re really bringing in and how much you’re really paying out.
The gross income is the amount of money that a property would bring in if it were fully occupied and operating at full capacity. You use the gross income when you’re calculating the value of a property to see what it would be worth if it were fully leased. It’s important to use the gross income when doing this because the operating expenses need to be taken into account as well.
The net operating income is the amount of money that you actually bring in from a property after accounting for all of the operating expenses. The net operating income is the metric that all investors look at when evaluating a property. It is the most accurate way to see how well a property is actually performing and how much money you’re really making from it.
Operating expenses are the costs that you incur to keep the property operational. This would include things like water, electric, gas, garbage, maintenance, property management, taxes, insurance, and repairs. It’s important to know the operating expenses for any given property because they can greatly affect your cash flow. If your expenses are higher than they were projected to be, your cash flow will be lower than you expected.
Vacancy is the amount of time that a property is unoccupied and therefore not bringing in any money. Vacancy is something that every investor has to deal with and it’s important to know how much vacancy your properties are experiencing. You can calculate the vacancy rate by dividing the number of empty units by the total number of units. If a property has a 10% vacancy rate, there are 10 units unoccupied out of 100 total units.
The vacancy rate is the percentage of empty units in a given property. For example, if you have 100 units in a property and 10 of them are empty, you have a 10% vacancy rate. The vacancy rate is a very important metric when evaluating a property because it can greatly impact your cash flow. If a property has a high vacancy rate, you’ll be receiving less cash than you expected. It’s important to keep the vacancy rate low to make sure that you’re receiving all of the money that is coming to you. Hopefully, you now feel more comfortable diving into commercial real estate. This can be a very profitable venture, but you have to know the terms and be able to understand the numbers behind it.
Last modified: March 25, 2023
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