Top 10 Key Terms in Commercial Real Estate

GPI. EGI. OpEx. NOI. DSCR. Sometimes, it seems the real estate industry has more acronyms than corporate america. But you don’t need to be a realty aficionado to understand commercial real estate. Once you know and understand these top 10 key terms, you’ll be golden:

1. UNDERWRITING

Reviewing the submarket and financials of a deal for risk and reward analysis. This basically equates to calculating each term below and coming up with a viable business plan to make profit.

2. GPI

Short for Gross Potential Income, GPI refers to how much income a commercial property has the capacity to generate if 100% occupancy is reached.

3. VACANCY & OCCUPANCY RATES

While Vacancy Rate refers to the percentage of vacant units within a rental property, the occupancy rate is just the opposite (the percentage of occupied units). 

These can be further divided into physical and economic occupancy: the former is the number of units rented over the total, and the latter is the actual rental income over the GPI.

4. EGI

Effective Gross Income is a total of the property’s Gross Potential Income (GPI) with Other Income, minus Credit, minus Vacancy costs.

5. OpEx

Operating Expenses include costs like maintaining and running a building, property taxes, repair costs, legal fees, janitor salaries, contractor services, lawn care, utilities, insurance, and the like.

6. NOI

Net Operating Income calculates the future profitability to a real estate investment. Mathematically, it’s the EGI minus the OpEx. Note that NOI does not include Debt Service (the loans).

7. CAP RATE

Capitalization Rate refers to an investment property’s rate of return, based on both its projected income relative to value, and what other investors in the market would be willing to pay for it today. These can go anywhere from 3% to 9% in multifamily. 

We will be posting a more detailed primer on Cap Rates, but for now just know that NOI divided by Purchase Price gives you the Cap Rate. There are different flavors of Cap Rate like Enter Cap Rate, Exit Cap Rate, Market Cap Rate. We will go into them in another email 🙂

8. DSCR

While Debt Service is the principal and interest payment from all loans in a property, Debt Service Coverage Ratio assesses a company or individual’s capacity to meet principal and interest payments. Mathematically, it’s the NOI over the Debt Service, and banks like at least a 1.25 as a requirement to offer you a term sheet.

9. CASH FLOW

The net sum of money that accrues in your bank account monthly. Real estate cash flow can be negative or positive, but you of course want it to be positive. (I hope!) Mathematically, Cash Flow is the NOI minus the Debt Service, minus any other fees.

10. ACTUALS VS. PRO FORMA

This one is important. While Actuals are based on the last 3, 6, or 12 months of a property’s financial data (also called T3, T6, and T12), a Pro Forma is more of an informed guesstimate of what these numbers will look like 1-5 years down the line. 

Pro-tip: while you underwrite a pro forma, you should make an offer based on actuals. (You offer based on what the asset is today, not what it will be in the future.) 

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And there you have it!

You don’t need to be an expert to know what’s what in the world of commercial real estate investing. Because we’ve all got 99 problems – but decrypting jargon should not be one.

At Equis Capital, we respect your capital, your time, and your dreams for the future. Let’s chat about how we can help you find and seize real estate investment opportunities that:

  • Yield hands-off cash flow
  • Require minimal daily effort
  • Guarantee full transparency
  • Deliver risk-adjusted returns

Feel free to drop your email below if you want to learn more.

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