Cash on Cash Return, also known as the return on investment, which is the heart of your money or your investor’s money; it is your annual cash flow divided by your down payment. This term is essential since it is not how much you spend on a property but how fast your money is coming out of the property. It is not exciting to spend $ 50,000 and take 20 years to get your $50,000 through cash flow, which is only a 5% return. This may be okay for a stockbroker but not for commercial real estate, where we expect a double-digit minimum return.
Debt Coverage Ratio
This term is frequently used by lenders, which are at the heart of the commercial real estate and financing. It is the amount of cash flow available to pay for your mortgage. To obtain DCR, NOI is divided by your annual debt. Commercial lenders want you to pay the mortgage and have something left over; DCR tells you how much is left over. This is important since the lender will check the first number to see if your deal is lendable, at least 1.2 or more.
This term is essential in determining the worth of a property and what to offer when considering buying a property. It also varies on the neighborhood or the sub-market you are in. Price per Unit is usually used for apartments and is obtained by dividing the property price by the number of units. For example, if you have a $ 500,000 apartment building and have ten units, you get $50,000 per Unit. That is how to calculate the price per Unit.
This term is used in retail centers, industrial and office buildings. The price per Unit is divided by the square footage’s price to determine the price per square foot. Therefore, $500,000 is divided by 10 000 square feet to get $50/sqft, which is the price/square footage.
Class A Building: these are the newest, high quality at the best locations and high rents. Usually attract tenants of the highest quality. This is not good for beginners since the price is too high with low returns and high competition with institutional buyers and funds since they can pay all cask and are okay with low returns.
Class B Building: These buildings are usually older but still of good quality and attract mainly average working-class tenants. An actual commercial investor aims to look for a class B building in a class A neighborhood, then renovating the building to a class A rent.
Class C Building: this is the lowest classification; the buildings are older and need renovation. They attract lower-middle-income tenants since the rent is low. Class C is the best for an apartment investing for the ratio between the price per Unit and the rents are good and can get high returns. Managing these properties requires skill since they need lots of maintenance, the neighborhoods and tenants could be challenging.
