Commercial real estate investments can be a great way to generate passive income and build wealth over time. However, it is important to have a thorough understanding of the terminology used in the industry before making any major decisions. To that end, this guide will provide an overview of some of the most common terms and phrases associated with commercial real estate.
The first term to know when considering a commercial real estate investment is cap rate. This stands for capitalization rate and is simply the ratio of net operating income (NOI) to purchase price or current market value. It tells investors how much they can expect to earn on their initial investment, expressed as a percentage. For example, a property with an 8% cap rate means that its annual income will be 8% of the purchase price or current market value.
Net operating income (NOI) is one of the key metrics used when evaluating the potential performance of a commercial real estate investment. NOI represents a property’s total income from operations after all expenses have been paid. It is important to understand NOI because it gives investors an indication of how profitable their investments are likely to be over time.
Another important term when dealing with commercial real estate investments is yield or return on investment (ROI). Yield indicates the annualized rate of return on an investment, considering rental income, appreciation, or other factors such as tax benefits. ROI measures overall performance by comparing the amount invested with what was gained from it over time. These metrics are helpful for determining which properties are likely to be profitable investments in the long run.
Gross leasable area (GLA) is another important metric used when analyzing commercial properties, as it represents the total amount of space available for tenants to lease within a given building or complex. GLA includes proportiaonal common areas, such as hallways and lobbies, that may be shared among tenants. Knowing the GLA helps investors determine how much rent they can charge tenants and gives them an idea of how many tenants they can accommodate within a single building or complex.
Tenants are also an important consideration when investing in commercial real estate, as they often help determine how successful a property’s returns will be. Leasing agreements should be reviewed carefully to ensure they include sufficient tenant protections and guarantee rent payment in case of vacancies or non-payment by tenants. Additionally, research should be done into prospective tenants’ credit worthiness and financial stability before signing any leases.
Commercial real estate terminology can seem daunting at first but with a basic understanding of key terms such as cap rate, net operating income (NOI), and gross leasable area (GLA), you can make informed decisions about your investments and get the most out of your commercial real estate portfolio. It is also important to understand the risks associated with commercial real estate investments before making any decisions.
These include zoning restrictions, costs like maintenance fees, fluctuating interest rates and market conditions that could cause values to change unexpectedly over time. In addition, tenants may default on their lease payments or move out unexpectedly due to changes in their businesses or personal situations.
NAI Real Estate professionals are commercial real estate experts and can help you navigate finding the best investment for your needs.