It’s normal for a particular career field to have its own lingo, and commercial real estate investing is no different. As a new real estate investor, there are several key terms you need to know before you begin investing. Without a general knowledge of the key terms, fully understanding what’s going on in a commercial real estate transaction can be intimidating. Understanding the core terminology used in the commercial real estate field will help you easily navigate any investment deal.
Net Operating Income (NOI): This refers to the income you generate annually from an income property after property expenses have been taken into consideration. Aside from rent, you may also generate other revenue from your commercial space, such as parking or laundry.
Capitalization Rate: Often referred to as the cap rate, this refers to the net operating income (NOI) divided by an income property’s sale price.
Debt Coverage Ratio (DCR): This compares an investment property’s NOI with its debt service. Lenders use this ratio to calculate whether or not you will be able to generate enough income to pay your debts.
Cash on Cash Return (CoC): This is used to measure the ratio between an asset’s annual cash flow in relation to the commercial property’s down payment.
Building Classification: Property values are determined by asset classifications. Investment property falls under one of four main categories: Class A, B, C, or D. Class A buildings are almost new, at a highly attractive location, and are known for proper maintenance. Class B are average buildings with fewer amenities. Class C buildings are older than 20 years, and they need a lot of improvement and repairs. Class D buildings require extensive renovation and are not for beginner investors.
It’s important to be well versed in industry terminology in order to be successful in this market. A good understanding of the most commonly used terms as well as having an experienced real estate attorney in Austin, TX, on your team and you’ll be in excellent position to excel in the commercial real estate field.