Commercial real estate differs from residential in many ways, including the metrics by which feasibility and return on investment are measured. Here are three metrics you should be familiar with and consider, with the help of an experienced broker.
Net Operating Income (NOI) - The NOI of a commercial real estate property is calculated by evaluating the property's first year gross operating income and then subtracting the operating expenses for the first year. You want to have positive NOI.
Cap Rate - A real estate property's "cap" – or capitalization – rate, is used to calculate the value of income producing properties. For example, an apartment complex of five units or more, commercial office buildings, and smaller strip malls are all good candidates for a cap rate determination. Cap rates are used to estimate the net present value of future profits or cash flow; the process is also called capitalization of earnings.
Cash-on-Cash - Commercial real estate investors who rely on financing to purchase their properties often adhere to the cash-on-cash formula to compare the first-year performance of competing properties. Cash-on-cash takes the fact that the investor in question doesn't require 100% cash to buy the property into account, but also accounts for the fact that the investor will not keep all of the NOI because he or she must use some of it to make mortgage payments. To uncover cash on cash, real estate investors must determine the amount required to invest to purchase the property, or their initial investment.