Commercial Real Estate Investment Terms

Updated: Jan 29



When we invest in real estate, it is essential that we should always keep in mind our goals and objectives. We all know that any investment is measured by income and growth. Here I will share some basic terms used to measure the rate of income and growth in real estate investments.

1. Cash on Cash Return or Return on Equity (ROE)

ROE is a rate that is often used to analyze the return on your initial investment. It refers to the relationship between the Pre-Tax Cash Flow, which is the cash remaining after the payment of the mortgage and all other operating expenses, compared against the amount of equity or down payment.

Return on Equity (ROE)=Pre-Tax Cash Flow (PTCF)/Equity

2. Overall Capitalization Rate (OAR)

OAR is often referred to as the Cap Rate for short. It is simply the property operating earnings (NOI) divided by the property asset price or value. The Cap Rate is similar to the concept of current yield which is percentage amount of current income the investor receives per dollar of current value of the investment. It is a direct measure of the current earnings on the investment property.

OAR=Net Operating Income/Value or OAR=NOI/V

3. Debt Service Coverage Ratio (DSCR)

DSCR measures the ability of the net operating income from the investment asset to pay down the debt. It is the relationship of the cash available after payment of all operating expenses except debt service to the amount of cash required for debt service (payments of principle and interest). Many lenders require a DSCR of at least 1.25%, meaning the net operating income needs to exceed debt payments by 25%.

DSCR=NOI/Annual Debt Service

4. Cash Break Even Ratio (BER)

BER measures the relationship between total cash outlay (Operating Expenses and Debt Service ) and the Potential Gross Income. BER equals Operating Expenses plus Debt Service divided by Potential Gross Income. The lower the ratio the better it is for the investor. For example, if the BER is 100%, that means the Potential Gross Income is only enough to cover the Operating Expenses and Debt Service. If the ratio exceeds 100%, that means the expenses exceed the potential income and the investor is losing money.

BER=(Operating Expenses +Debt Service)/PGI

5. Loan to Value Ratio (LTV)

LTV measures the relationship between the amount that you borrowed and the purchase price or appraised value of the asset. This is often used by the lender to evaluate the financial risk of their loan. The higher the LTV the higher the lender’s risk that the loan will go into default. Lender’s may require additional security for a loan that has a high LTV.

LTV = Loan Amount/Property Value or Purchase Price

6. Gross Income Multiplier (GIM)

GIM is the ratio that measures the relationship between a property’s gross annual income and its selling price. GIM usually is used for analysis of small commercial units and warehouses.

GIM=Selling Price/Gross Annual Income

7. Gross Rent Multiplier (GRM)

GRM is the ratio between a property’s gross monthly rental income and the sale price of the property. GRM usually measures the value of rental houses and multi-family properties of up to 16 or 20 units. GRM only refers to the rent whereas GIM includes all income generated from a property. GRM is used to value the lower income producing and more frequently sold commercial properties.

GRM=Selling Price/Monthly Rent Income

8. Internal Rate of Return (IRR)

The two major types of return measures are period-by-period (also called periodic returns) and multi-period returns. Periodic returns are usually referred to as holding period returns (HPR). They measure the investment return within each single period of time.

The second type of return measure is the multi-period return. It refers to a relatively long-term period of time during which there can be cash flows into or out of the investment at intermediate points in time.

IRR is a rate that measures the multi-period return. IRR can be calculated without having to know the capital value of the investment at intermediate points in time. IRR is a money-weighted return and it reflects the effect of having different amounts of money invested at different periods of time during the overall lifetime of the investment.

With IRR you calculate the actual return provided by the project’s cash flows, then compare that rate of return with your targeted return rate on your investment. If the IRR is higher than your targeted rate, it’s a worthwhile investment.

In calculating the IRR of a property you need to know:

1) The purchase price of the property

2) the net cash flow generated by the property during each period since purchase

3) an estimate of what the property is currently worth (or what is was sold for).

Assume: 1) regular intermediate cash flows grow at a constant rate G and

2) the asset value always remains a constant multiple of the current period cash flow.

The IRR will equal the sum of the initial cash yield rate Y plus the growth rate G.

IRR=Y+G.

9. Net Present Value (NPV)

A very important commercial property investment measurement we should all know is the net present value (NPV). The NPV of an investment project or a deal is defined as the present dollar value of what is being obtained minus the present dollar value of what is being given up (the cost).

NPV investment decision rule:

1) Maximize the NPV across all mutually exclusive alternatives.

2) Never choose an investment property that has a negative NPV.

If buying the property: NPV=V-P

If selling the property: NPV=P-V

V is value of the property at the time of purchase or sale. Generally, it refers to the price at which the property is expected to sell in the current asset market.

P is selling price of property in present time equivalent dollars.

This is based upon the concept that the underlying operating cash flow is discounted to present value at the required rate of return. This procedure consists of three steps:

1) Forecast the expected future cash flows.

2) Ascertain the required total return.

3) Discount the cash flows to the present value at the required rate of return.

The opportunity cost of capital for the property refers to the going-in IRR which is expected average multi-period (per period) of return at the present time.

A deal does not have to have a large positive NPV to be a successful transaction. In fact, a zero NPV deal is fine. Zero NPV deals are not zero-profit deals. Zero NPV simply means that the discount cash rate is equal to the opportunity cost of capital. Another way to look at it is that a zero NPV means that the purchase price and current value of the property based upon the expected return on investment match up exactly. In practice, positive NPV deals are great deals. However, sometimes a deal can appear to have a large positive NPV when it actually does not because it includes overly optimistic assumptions for income, expenses and growth in asset value and fails to account for the risks of the investment. In fact, a zero NPV is more typical for a real estate investment deal when future income and expenses can be predicted with a fair amount of accuracy and the target Cap Rate in the market is fairly stable.

当我们投资房地产时,我们必须始终牢记我们的投资目的和目标。 任何投资都是以投资的收入和增长来衡量的。在这里,我将分享一些用于衡量房地产投资收入和增长率的基本术语。

现金回报或权益回报现金(ROE)

ROE是通常用于分析初始投资回报率的指数。是指支付抵押贷款和其他所有的经营费用之后的税前现金流量与权益金额或首付比例之间的关系。

股本回报率(ROE)=税前现金流量(PTCF)/权益

2.总资本化率(OAR)

OAR通常简称为Cap Rate。OAR等于物业经营净收益(NOI)除以物业资产价格或价值。上限利率与目前收益率的概念相似,即投资者每美元现金收益的百分比,即投资的现值。用来衡量投资性房地产当前收益的状况。

OAR =净营业收入/价值 或 OAR = NOI / V

3.债务偿还率(DSCR)

DSCR衡量投资资产净营业收入偿还债务的能力。DSCR指的是投资物业支付所有营业费用后的净收入与所需偿付债务的金额(包括原则和利息支付)之间的关系。许多贷方要求DSCR至少为1.25%,这意味着净营业收入需要超过债务额的25%。

DSCR = NOI /年度债务服务

4.现金收支平衡比(BER)

BER衡量总现金支出(经营费用和债务偿还)与潜在总收入之间的关系。 BER等于经营费用加上债务服务除以潜在总收入。投资者的BER比例越低越好。例如,如果BER是100%,那就意味着潜在的总收入仅够支付经营费用和债务服务。如果比率超过100%,则意味着投资物业的费用超过潜在收入,投资者处于亏损状态。

BER =(营业费+债务服务)/ PGI

贷款利率(LTV)

LTV衡量你借入的金额与资产的购买价格或评估价值之间的关系。贷款人经常使用这种方式来评估其贷款的财务风险。 LTV越高,贷款人的贷款风险越高,违约几率就越大。贷款人可能需要提供高额风险贷款的额外担保。

LTV =贷款金额/物业价值或购买价格

7. 总收入乘数(GIM)

GIM是测量财产年度总收入与其销售价格之间关系的比例。 GIM通常用于小型商业物业和仓库的分析。

GIM =物业销售价格/年度总收入

8.总租金乘数(GRM)

GRM是物业的每月租金总收入与物业的售价之间的比例。 GRM通常用来衡量16或20个单元的出租物业。 计算GRM只计算租金收入,而计算GIM包括从财产产生的所有收入。 GRM常常用于评估收入比较低和频繁出售的商业物业。

GRM =物业售价/每月租金收入

9.内部收益率(IRR)

两种主要类型的回报率是逐周期回报率(也称为定期回报)和多期回报率。定期回报率通常被称为持有期回报率(HPR)。它衡量在每一个时间段内的投资回报。

第二种类型的回报率是多期回报。是指在相当长的一段时间内的投资回报率,在这段时间内中间段可能有现金流入或流出。

内部收益率是衡量多期回报的利率。可以计算出内部收益率,而不必知道中间时间段的投资资本值。内部收益率是一种货币加权回报,反映在整个投资期间不同时期投入不同数量的资金的影响。

使用IRR计算投资项目现金流量提供的实际回报率,然后将此投资回报率与目标回报率进行比较。如果内部收益率高于你的目标利率,这是项目就值得投资。

在计算物业的内部收益率时所需知道:

1)物业的购买价格

2)购买后期间物业产生的净现金流量

3)物业在出售时价值的估算。

假设:1)正常的中间现金流以恒定的速率G增长

2)物业总是保持一个恒定的现金流增长倍数。

IRR将等于初始现金收益率Y加上增长率G的总和。

IRR = Y + G。

10.净现值(NPV)

一个非常重要的商业物业投资计量是净现值(NPV)。投资项目或交易的净现值被定义为物业的当前美元价值减去现在的成本价值。

净现值投资决策规则:

1)通过所有相互排斥的替代方案最大化NPV。

2)不要选择负NPV的房地产。

如果购买物业:NPV = V-P

如果出售物业:NPV = P-V

V是购买或出售时物业的价值。一般来说,它是指物业在现有资产市场中预期出售的价格。

P当前的物业售价相当于美元。

NPV是基于这样的概念,即将基本经营现金流量以所需回报率折现为现值。该过程由三个步骤组成:

1)预测未来现金流量。

2)确定所需的总回报率。

3)以所需的回报率将现金流量折现为现值。

财产资本的机会成本是指目前期望的平均多期(每期)回报的IRR。

一笔成功的物业交易不一定非要有很大的正值NPV。事实上,零NPV交易非常正常。零NPV交易不是零利润交易。零NPV只是意味着折现现金率等于资本的机会成本。另一种看法是,零NPV意味着基于预期的投资回报率物业的购买价格和当前价值恰好匹配。在实际交易中,我们都希望正值NPV越大越好,然而 NPV很大应值得怀疑。有时一个交易看起来可能具有很大的正值NPV,实际上的NPV没有那么大,因为对收入,费用和资产价值增长的过度乐观的假设,只考虑了资金成本费用,忽略了其它费用 和投资的风险。实际上,零价NPV 在地产投资交易中非常普遍,在市场比较稳定的情况下,零NPV 恰好准确地反映了未来预期收入和费用。