Introduction
Before investing in commercial real estate or even after you have had your investment property for some time, it is important to check on your investment’s return and expenses. This will help you keep track of every dollar involved in the investment, see if you have room to refinance and help you reach your goal! These metrics can be checked from the comfort of your home without the use of a professional.
NOI
NOI stands for net operating income. It's a measure of the profitability of your commercial property and is used as a factor in calculating the cap rate. The cap rate is a ratio that you can use to determine how much annual cash flow will be generated by your property, which can then be used to calculate its value.
The formula for calculating NOI is:
Gross income - operating expenses = net operating income
Capitalization Rate
Capitalization rate (cap rate) is the ratio of net operating income to property value. The capitalization rate is calculated by dividing the Net Operating Income (NOI) from a property by its market value, and then multiplying that number by 100.
The actual formula for calculating cap rate is:
CAP RATE = ([Annual NOI] / [Market Value]) * 100
Cash on Cash Return
Cash on cash return is the most important metric to evaluate when investing in real estate. The cash-on-cash return is calculated by dividing the net operating income (NOI) by the total investment, and it’s expressed as a percentage.
NOI = Net operating income; usually considered equivalent to earnings before depreciation, interest and taxes (EBITDA).
Cash Investment = Total purchase price for property less any seller concessions or closing costs paid by buyer such as title insurance, escrow fees and loan origination points
Conclusion
The commercial real estate market is a dynamic one, and there are many factors to consider when looking at potential investment opportunities. With this information in mind, you can make better decisions about your next purchase and become a better commercial real estate investor.