Quickly analyzing a commercial property is not only possible if you understand a few key terms…. But actually is much simpler than you might think when you’re evaluating commercial real estate, particularly multifamily real estate there are a few things you’re going to want to know.
For example You of course need to know How much money the property going to make you’ll want to know What the return is going to be on your investment And you’ll want to know How does the property that you’re looking at compare to other investments. What I’m going to show you today will help you with all of that. First, Let’s talk about the four key terms. The first term you need know and understand is Net Operating Income. This is actually quite simple, the net operating income or NOI as it’s known in the business, is the gross Income on the property which would include rents, and any other income the properties producing for example from a laundromat or storage. Then you would just subtract the operational expenses on the property and the difference is the net operating income or NOI. So you understand these…….
Operational expenses include things like, property insurance, taxes , repairs and maintenance, property management and advertising…. Now these operational expenses do not include the mortgage or debt. We’ll talk about where the mortgage comes in in a minute. I’m also going to give you an example so you can see this after I’m done describing these terms. So again the net operating income for the in a lie which is the first time you need to understand is simply the gross income on the property less the operational expenses. That’s the NOI. I actually think the analyze probably the most important number you’ll want to determine when evaluating a property because of the huge impact the NOI has on the value……when it goes up so does the value. In those increases in the property’s value from an increase in the N OI are really exponential. And when the NOI goes down so does the value down. Now remember, Don’t confuse NOI with gross income on a property. Cash Flow is the next very important barometer in investment property.
For our purposes we will define Cash Flow as the NOI minus the mortgage payments on the property. The next very important term you need to be familiar with is Cash on Cash Return. Cash on cash return shows me How fast my money is moving. It actually tracks The velocity of your money. Or how fast its growing. It will show you How fast you can get 100% of your money back? So if you have cash on cash return of 25% you basically get your cash back in four years. 25% per year for four years as 100% of your
cash back and again I’m going to show you an example of this in a moment. So the calculation for cash on cash is actually also very simple. It’s just the Annual cash flow divided by down payment or All of the money initially invested in the deal. Now let’s talk about the Capitalization Rate.