Commercial real estate is an asset class with various property types. Even though it is real estate, the value of a commercial asset differs from a residential property usually in two ways. The value is tied to the income and for multifamily, anything with 5 units and above is considered non-residential. So, with that distinction let’s look at some important terms that you’ll hear when involved with the industry.
Capitalization Rate (Cap Rate)
Basically, if you were to buy a property with just cash and no leverage (no debt), your cap rate would be the (net operating income) / (purchase price or appraised value). One can do a quick analysis on the state of the market, by seeing if a cap rate for a certain property type might be less than normal which means the property type is overpriced.
Net Operating Income (NOI)
The net operating income is simply the gross revenue that property generates subtracted by the operating expenses of the property. These are the expenses that it takes to operate and maintain the property which varies per location property type, property class etc.. So, gross revenue – operating expenses = net operating income.
Operating Expenses
To operate and maintain a property will require you to spend money. These expenses typically include payroll, maintenance and repairs, contract services, make ready, advertising/marketing, admin, utilities, management fees, taxes and insurance. It takes alot to build a property and it takes alot to operate and maintain one as well, but these are your general operating expenses.
Operating Agreement
This is the part of the LLC which is a legal document that outlines the ownership and membership duties. So for an apartment syndication, this document will highlight the responsibilities and ownership percentages for the general and limited partner.
There’s alot of terms to go over and will be covering more in future posts.. .
