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Common Metrics/Terms an Investor Uses to Analyze Commercial Real Estate

Common Metrics/Terms an Investor Uses to Analyze Commercial Real Estate
It’s not a secret that numbers drive real estate investment decisions. But the real question is, which metrics are valid? Which metrics matter? Depending on your investment goals and property type, some metrics are more important than others. The following metrics/terms real estate investors commonly use when making portfolio decisions: 1. Capitalization Rate (Cap Rate) Cap rate is mostly used for apartment complexes and commercial buildings. Capitalization rate can also be used for houses and small multifamily properties, but the flip side is that operating expenses are unpredictable with houses since you can’t know how often or how bad your turnovers may be. Cap rate allows you to compare properties in the same asset class with different characteristics that make direct comparison impossible. The disadvantage of the Cap rate is that it’s only a snapshot. It says nothing about the expected growth in expenses, rents, property value, and whether using leverage will increase your return. 2. Cash Flow When evaluating rental properties, it’s vital to figure out your expected monthly cash flow. When determining total expenses, you should include: Property taxes Flood and hazard insurance Water Sewer Garbage Electricity Property management General maintenance and upkeep Capital expenditures Vacancy rate 3. Return on Investment (ROI) RoI is helpful for analyzing how well a deal did in the past. This measurement is always good to have because you can’t adjust your future investing unless you know how your previous investments performed. 4. Internal Rate of Return (IRR) The internal rate of return is used to m......
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