CRE

Cap Rate

The primary metric for valuing income-producing properties, calculated as Net Operating Income (NOI) ÷ Purchase Price. It reflects the unlevered rate of return on an all-cash purchase.

Cash-on-Cash Return

Measures annual yield to investors, calculated as Annual Cash Flow ÷ Equity Invested, focusing only on cash distributions. It ignores principal paydown and appreciation, focusing solely on immediate cash flow generated by the investment.

Equity Multiple

Shows how many times your initial investment is returned over the hold period, calculated as Total Cash Flow ÷ Equity Invested. It is a simple measure of total profit relative to initial equity, without considering the time value of money.

Internal Rate of Return (IRR)

The discount rate that makes the Net Present Value (NPV) of cash flows equal to 0, accounting for timing of cash flows. It is widely used to compare the profitability of different projects by reflecting the annualized effective compounded return rate.

Debt Service Coverage Ratio (DSCR)

Measures how well property income covers loan payments, calculated as NOI ÷ Annual Debt Service. Most lenders require a DSCR of 1.20 or higher, indicating sufficient cash flow to cover debt obligations.

Debt Yield

Lender-focused risk metric, calculated as NOI ÷ Loan Amount, shows how quickly a lender could recoup principal in a foreclosure. It's often favored by CMBS lenders as a quick measure of loan risk, independent of the interest rate or amortization.

Loan-to-Value (LTV)

Measures leverage and lender risk, calculated as Loan Amount ÷ Property Value. Lenders typically have maximum LTV thresholds, as higher LTV indicates higher risk for the lender.

Yield-on-Cost (YoC)

Used for development/value-add deals, calculated as Stabilized NOI ÷ Total Project Cost. It helps evaluate the profitability of a project post-stabilization relative to its total investment, especially for new construction or significant renovations.

Breakeven Occupancy

Tells you the minimum occupancy needed to avoid negative cash flow, calculated as (OpEx + Debt Service) ÷ Gross Potential Income. Understanding this allows investors to assess the property's resilience and operating efficiency.

Gross Rent Multiplier (GRM)

Quick valuation shortcut for smaller multifamily properties, calculated as Purchase Price ÷ Gross Scheduled Rent. It is a simpler metric that does not account for operating expenses, vacancy, or other income.

Operating Expense Ratio

Measures operational efficiency, calculated as Operating Expenses ÷ Effective Gross Income. A lower ratio generally indicates better operational management and profitability.

Price per Unit

Used for multifamily comps, calculated as Purchase Price ÷ Number of Units.

Price per SF

Used for office, retail, and industrial comps, calculated as Purchase Price ÷ Rentable Square Feet.

Vacancy Loss %

Shows income lost due to vacancy, calculated as Vacancy ÷ Gross Potential Rent. This metric is crucial for forecasting effective gross income and assessing market demand.

Effective Gross Income (EGI)

Represents actual revenue before expenses, calculated as Gross Potential Rent – Vacancy + Other Income. EGI is a key input for calculating Net Operating Income (NOI).

Stabilized Yield

Similar to YoC, calculated as Stabilized NOI ÷ Total Project Cost, used once a property is stabilized. It indicates the cash flow generated by a fully occupied and operational property relative to its total cost, confirming the initial YoC estimate.

Unlevered IRR

IRR assuming no debt, showing asset-level return, used to compare deals independent of financing. It provides a clear picture of the underlying property's performance, unaffected by financial leverage.

Levered IRR

IRR including the impact of debt, shows return to equity investors with financing. Levered IRR directly reflects the return seen by equity investors and is generally higher than unlevered IRR due to the positive impact of leverage.

CapEx per Unit

Helps gauge renovation intensity and costs per unit, calculated as Total CapEx ÷ Units. It's essential for budgeting and evaluating the extent of capital improvements needed for a property.