If you’re new to commercial real estate investing, you might not be aware of the industry lingo when it comes to determining whether a property is worth buying. In fact, you might only know one thing – that you want to make money from your investment. That’s a great start, but it’s not enough. In this article, we will explain popular terms and tactics for deciding whether you should buy a property or keep looking for a better one.

Comps, comps, comps

When you find a commercial property that seems like it could be promising, the first step is to investigate comparable buildings (“comps”) in the same area. Find the ones that are most similar to the building you’re looking at – this includes size, age of the building, number of units, and location. A great place to find these buildings is on Loopnet, a website that specializes in commercial property sales.

This exercise will give you a good range of possible returns for the building. Once you have your list of comparable buildings, analyze the differences. Why do you think the lowest priced building is cheaper than the higher priced building? Is it in worse condition? Does it lack a parking lot? Try to figure out where your potential building lies in the hierarchy of comps.

Net operating income (NOI)

Once you start browsing commercial properties online, you’ll see this term come up a lot. This is the amount of income the building brings in, after all operating expenses (including vacancies) and before a mortgage is paid. This is a great indicator of the building’s potential, but make sure the numbers you’re being given are real and traceable, and that the seller isn’t going off of “projected” income (which may or may not be realistic).

Cap rate

The cap rate is determined by dividing the property’s sale price by the net operating income. The result is a percentage which can be a good guide for how much of your investment you should be able to re-capitalize in the first year. However, keep in mind that the cap rate does not consider fluctuating income and expenses which can have a big impact on returns.

Cash flow

This one is really simple, no equation is needed. It’s the amount of money left in your pocket each month after all expenses are paid. 

Cash-on-cash return

This is another metric that comes in the form of a percentage, just like cap rate. It is figured by dividing the amount of cash you put down on the property by the annual cash flow it produces.

Gross income

You’re probably familiar with gross income versus net income, as those are common terms used on our taxes each year. Gross income is the total amount of money a property brings in before expenses. But remember – just because that number is high doesn’t necessarily mean it’s a good investment. You will need to determine all of the outgoings before deciding that.

Don’t be afraid to ask questions

If you’re new to investing, it’s only natural to have a lot of questions. Don’t be afraid to ask them. In fact, ask all the questions you possibly can before you become the new owner of a terrible investment property. In the age of the internet, there are countless websites, message boards, and YouTube videos which can help educate you, as well as in-person investor meetups. Utilize those free resources! 

If you’re looking to buy a commercial property in the San Diego area, be sure to call Kronos to learn more about our property management services. We proudly stand out from impersonal national firms by listening to our clients and providing personalized services based on their needs. 

Give Kronos a call today at 619-488-7870 or 858-956-5983. You can also follow us on LinkedIn and Facebook. 

We look forward to speaking with you!