3 Commercial Real Estate Metrics Investors Should Know
2.5 min read
Believe it or not, metrics play a key role in commercial real estate investments. Why? Like most industries, data significantly drives investment decisions as it provides insight into whether the property is a suitable addition to your portfolio.
Below are three metrics that commercial real estate investors should know when considering investing in commercial real estate.
Net Operating Income (NOI)
Net operating income (NOI) is a calculation that is used to analyze the profitability of income-producing real estate investments before adding in any costs from financing or taxes. NOI helps potential investors determine how much income they can expect from the property, otherwise known as the capitalization rate. This, in turn, makes it easier to compare different properties that potentially hold more value. To calculate NOI, an investor would subtract all operating expenses incurred on the property from the revenue generated.
Capitalization Rate
Capitalization rates help an investor estimate the potential return on investment for the property. It is often used to compare similar properties currently on the market to determine which property would be a more suitable investment. To calculate the capitalization rate, an investor would divide the annual net operating income by the price or current value of the property. It’s essential to keep in mind that your return on investment decreases when capitalization rates increase.
Cash-on-Cash Return
Cash-on-cash return is an important metric when calculating potential financing expenses and a key determining factor when determining if the property is being sold for less than market value. Overall, this metric indicates potential equity and whether the property will be a good long-term investment. To calculate cash-on-cash return, an investor would divide the annual pre-tax cash flow by the total cash invested.
Investing in commercial real estate can lead to increased profitability if done correctly. Considering the above metrics during your investment decision will help you secure a property that adds value to your portfolio.
References
3 basic commercial real estate metrics. Commercial Real Estate Retail Space for Lease in Calgary. (n.d.). Retrieved June 8, 2022, from http://calgaryretailservices.com/3-basic-commercial-real-estate-metrics/
Follow meJeri FrankCEO at STRATAFOLIOCo-founder and CEO of STRATAFOLIO, & Frank, J. (2022, February 1). The metrics that matter the most to real estate investors. STRATAFOLIO. Retrieved June 8, 2022, from https://stratafolio.com/metrics-that-matter-to-real-estate-investors/
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