👋16 CRE Terms You Need to Know

[Justin Goodin]

 16 terms you need to know in commercial real estate:

1. Internal Rate of Return (IRR): A metric used to estimate the annualized return on an investment based on the timing and magnitude of cash flows.

2. Cash-on-Cash Return: The annual income generated by a property expressed as a percentage of the initial cash investment.

3. Discount Rate: The rate used to discount future cash flows to their present value in financial models; often represents the required rate of return.

4. Capital Expenditures (CapEx): The funds set aside for property improvements, renovations, or major repairs.

5. Gross Operating Income (GOI): The total income generated by a property before subtracting operating expenses.

6. Operating Expenses: The costs associated with managing and maintaining a property, including utilities, taxes, insurance, and maintenance.

7. Debt Service Coverage Ratio (DSCR): A measure of a property's ability to cover its debt payments, typically calculated as NOI divided by debt service.

8. Loan-to-Value (LTV) Ratio: The ratio of the loan amount to the property's appraised value, used to assess risk in financing.

9. Equity Multiple: A measure of the total return on an investment, calculated as the ratio of total cash flows to initial equity investment.

10. Residual Land Value: The estimated value of land after deducting development costs and desired profit margins.

11. Sensitivity Analysis: A technique used to assess how changes in key variables (e.g., rent, expenses, interest rates) affect financial model outcomes.

12. Operating Pro Forma: A projection of a property’s income and expenses over a specified period, typically used for budgeting and financial analysis.

13. Cash Flow Waterfall: A structured distribution of cash flows to different stakeholders in a real estate project, often involving equity investors, lenders, and developers.

14. Leverage: The use of borrowed funds (e.g., a mortgage) to finance a real estate investment, potentially amplifying returns but also increasing risk.

15. Equity Investment: The amount of money invested by equity partners or investors in a real estate project.

16. Yield-on-Cost: The return on an investment based on the original development or acquisition cost.