Commercial Real Estate Investment Calculator
Understanding Commercial Real Estate Metrics
Investing in commercial real estate (CRE) requires a disciplined approach to numbers. Unlike residential real estate which is often valued based on comparable sales, commercial property value is driven primarily by the income it generates. This calculator helps you evaluate the financial viability of a commercial asset by calculating the most critical KPIs used by lenders and professional investors.
1. Net Operating Income (NOI)
NOI is the bedrock of commercial valuation. It is calculated by taking the total potential income from rent and other sources (like parking or laundry) and subtracting all operating expenses (taxes, insurance, maintenance, management). Notably, NOI does not include mortgage payments or capital expenditures.
2. Capitalization Rate (Cap Rate)
The Cap Rate represents the unleveraged rate of return on a real estate investment. It is the ratio of NOI to the property purchase price. For example, a property purchased for $1M with an NOI of $70,000 has a 7% Cap Rate. Generally, a higher cap rate indicates higher risk and higher potential return.
3. Cash-on-Cash Return
While Cap Rate looks at the property as if it were bought with cash, the Cash-on-Cash (CoC) return measures the actual return on the specific dollars you invested (your down payment). It is calculated by dividing your annual pre-tax cash flow by the total cash invested. This is vital for understanding how leverage (debt) affects your return.
4. Debt Service Coverage Ratio (DSCR)
Lenders use the DSCR to determine if a property generates enough income to cover its debt obligations. A DSCR of 1.0 means the property breaks even. Most commercial lenders look for a DSCR of 1.20 to 1.25 or higher to approve a loan.
Example Calculation
Imagine you are looking at a retail strip mall priced at $2,000,000.
- Gross Income: $250,000
- Operating Expenses: $90,000
- NOI: $160,000 ($250,000 – $90,000)
- Cap Rate: 8% ($160,000 / $2,000,000)