Commercial Real Estate

NOI

Net operating income (NOI) is a calculation used to analyze real estate investments that generate income. Net operating income equals all revenue from the property minus all reasonably necessary operating expenses. Aside from rent, a property might also generate revenue from parking and service fees, like vending and laundry machines. Operating expenses are those required to run and maintain the building and its grounds, such as insurance, property management fees, utilities, property taxes, repairs and janitorial fees. NOI is a before-tax figure; it also excludes principal and interest payments on loans, capital expenditures, depreciation and amortization. Read more: Net Operating Income - NOI http://www.investopedia.com/terms/n/noi.asp#ixzz4Pa2Fhxir Follow us: Investopedia on Facebook

Cash on Cash Return

Cash on Cash Return is one of the most important real estate financial return on investment (ROI) calculations. It is also probably the easiest to calculate and understand. The Cash on Cash Return helps you evaluate the long-term performance of a real estate investment. Cash on Cash Return is the property's annual net cash flow divided by your net investment, expressed as a percentage. Formula: Cash on Cash Return = A Property's Annual Cash Flow divided by Down Payment (Investment)

Gross Rent Multiplier

Gross Rent Multiplier is the ratio of the price of a real estate investment to its annual rental income before accounting for expenses such as property taxes, insurance, utilities, etc.[1] To sum up Gross Rent Multiplier, it is the number of years the property would take to pay for itself in gross received rent. For the investor looking to purchase, a higher GRM (perhaps over 12) is a poorer opportunity, whereas a lower one (perhaps under 8) is better

Cap Rate

Often just called the cap rate, is the ratio of Net Operating Income (NOI) to property asset value. So, for example, if a property was listed for $1,000,000 and generated an NOI of $100,000, then the cap rate would be $100,000/$1,000,000, or 10%.Jun 3, 2013

Loan To Value Ratio

The Loan-to-Value Ratio is a real estate financial term used by lenders to compare the amount of a property's loan to the value of the property, expressed as a ratio. The loan-to-value is calculated by taking the amount of the loan (mortgage) and dividing it by the fair market value (FMV) of the property. The value of the property is generally determined by an appraiser or sometimes the purchase price. Generally, lesser determined value of the two is used. By way of example, if a property is worth $100,000 and has a mortgage balance of $60,000, the Loan-to-Value ratio is calculated as 60%. This also means that 40% of the value (100% less 60%) of the property is equity.

Debt Coverage Ratio

The debt coverage ratio measures the ability to pay the property's monthly mortgage payments from the cash generated from renting the property. Bankers and lenders use this ratio as a guide to help them understand whether the property will generate enough cash to pay rental expenses and whether you will have enough left over to pay them back on the money you borrowed. The DCR is calculated by dividing the property's annual net operating income (NOI) by a property's annual debt service. Annual debt service is annual total of your mortgage payments (i.e. the principal and accrued interest, but not your escrow payments). Formula: Debt Cover Ratio (DCR) = Net Operating Income / Debt Payments

Internal Rate of Return

When you have an investment that creates differing amounts of annual cash flow, you need to determine your rate of return using the Internal Rate of Return (IRR). The formula for computing the IRR is very complicated but essentially IRR is the rate needed to convert (or discount or reduce) the sum of the future uneven cash flow to equal your initial investment or down payment.