It’s common for many investors to enter the world of commercial real estate before completely educating themselves on the basics of commercial properties. Generally, new investors will use a spreadsheet to calculate critical information and move forward without fully grasping what they have estimated.
In order to be a successful investor, there are a few things that you should understand; the vocabulary, percentages, and what numbers mean. These three aspects of commercial real estate investing are useful to all investors at any level.
Vocabulary
Commercial real estate investors should be very familiar with vocabulary that might help them determine the profitability of a potential investment. Being familiar with all of these terms as well as comprehending how they relate to one another before entering into a commercial real estate transaction will not only help you in the long run, but will allow you to ask the proper questions that may lead to a better deal and/or understanding of the property.
| · Gross Income | · Vacancy Rate |
| · Effective Gross Income | · Operating Expenses |
| · Net Operating Income | · Debt Service |
| · Cash Flow | · Cash-on-Cash Return |
| · Capitalization Rate |
Once you understand the standard definitions of the terms that you may run into, it is important to understand what makes these words relevant in regard to numbers and what this will mean for your investment.
Understand the Numbers and Percentages
Understanding the expected and acceptable percentages that come along with commercial real estate directly ties to your knowledge of common vocabulary. Knowing what percentages are acceptable for the terms above is important for anyone who wants to be serious about commercial real estate. For example, with vacancy rates, an investor should be able to calculate the vacancy rate as well as know what is considered a high/low vacancy rate for that area. Additionally, an investor should be able to calculate what percentage of gross income is consumed by operating expenses and how to use that information to be a better investor.
Overall, even if you have a grasp of the vocabulary and percentages, it is still important to be able to put all of that information together and understand the situation that the numbers are trying to tell you. For more information on Commercial Investing, visit our blog.
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