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.


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。





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



DSCR = NOI /年度债务服务


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


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


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













IRR = Y + G。






如果购买物业:NPV = V-P

如果出售物业:NPV = P-V








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。