CRE

1. Cap Rate

Formula:

Cap Rate = Net Operating Income (NOI) ÷ Purchase Price

Use:

• Primary metric for valuing income-producing properties.

• Lets investors compare properties in the same market.

• Lower cap = lower risk but lower yield.

• Example: If NOI = $500,000 and cap = 5%, value = $10M.

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2. Cash-on-Cash Return

Formula:

Cash-on-Cash = Annual Cash Flow ÷ Equity Invested

Use:

• Measures annual yield to investors.

• Focuses only on cash distributions, not appreciation.

• Example: $70,000 annual cash ÷ $1M invested = 7% CoC return.

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3. Equity Multiple

Formula:

Equity Multiple = Total Cash Flow ÷ Equity Invested

Use:

• Shows how many times your initial investment is returned over the hold period.

• Example: $2.2M returned ÷ $1M invested = 2.2x.

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4. Internal Rate of Return (IRR)

Formula (conceptual):

IRR is the discount rate that makes the NPV of cash flows = 0.

Use:

• Accounts for timing of cash flows.

• Used to compare deals with different hold periods.

• Example: Two deals both return 2x equity, but one in 3 years has a much higher IRR.

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5. Debt Service Coverage Ratio (DSCR)

Formula:

DSCR = NOI ÷ Annual Debt Service

Use:

• Measures how well property income covers loan payments.

• Lenders usually require DSCR > 1.20x.

• Example: $600K NOI ÷ $500K debt service = 1.2x DSCR.

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6. Debt Yield

Formula:

Debt Yield = NOI ÷ Loan Amount

Use:

• Lender-focused risk metric, independent of interest rates.

• Shows how quickly a lender could recoup principal in a foreclosure.

• Example: $900K NOI ÷ $9M loan = 10% debt yield.

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7. Loan-to-Value (LTV)

Formula:

LTV = Loan Amount ÷ Property Value

Use:

• Measures leverage and lender risk.

• Example: $12M loan ÷ $16M property = 75% LTV.

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8. Yield-on-Cost (YoC)

Formula:

Yield-on-Cost = Stabilized NOI ÷ Total Project Cost

Use:

• Used for development/value-add deals.

• If YoC > Market Cap Rate, the project is creating value.

• Example: $1.2M NOI ÷ $15M cost = 8% YoC vs. 6% market cap = 2% value spread.

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9. Breakeven Occupancy

Formula:

Breakeven Occupancy = (OpEx + Debt Service) ÷ Gross Potential Income

Use:

• Tells you minimum occupancy needed to avoid negative cash flow.

• Example: ($700K OpEx + $300K debt) ÷ $1.25M GPR = 80% breakeven.

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NICE-TO-KNOW CRE METRICS

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10. Gross Rent Multiplier (GRM)

Formula:

GRM = Purchase Price ÷ Gross Scheduled Rent

Use:

• Quick valuation shortcut for smaller multifamily.

• Example: $10M price ÷ $1M gross rent = 10x GRM.

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11. Operating Expense Ratio

Formula:

OpEx Ratio = Operating Expenses ÷ Effective Gross Income

Use:

• Measures operational efficiency.

• High ratio = costs eating into revenue.

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12. Price per Unit

Formula:

Price per Unit = Purchase Price ÷ Number of Units

Use:

• Used for multifamily comps.

• Example: $10M ÷ 100 units = $100K/unit.

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13. Price per SF

Formula:

Price per SF = Purchase Price ÷ Rentable Square Feet

Use:

• Used for office, retail, and industrial comps.

• Example: $12M ÷ 100,000 SF = $120/SF.

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14. Vacancy Loss %

Formula:

Vacancy % = Vacancy ÷ Gross Potential Rent

Use:

• Shows income lost due to vacancy.

• Critical for stabilized vs. pro forma analysis.

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15. Effective Gross Income (EGI)

Formula:

EGI = Gross Potential Rent – Vacancy + Other Income

Use:

• Represents actual revenue before expenses.

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16. Stabilized Yield

Formula:

Stabilized Yield = Stabilized NOI ÷ Total Project Cost

Use:

• Similar to YoC, used once a property is stabilized (leased and operating).

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17. Unlevered IRR

Definition:

IRR assuming no debt — shows asset-level return.

Use:

• Used to compare deals independent of financing.

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18. Levered IRR

Definition:

IRR including the impact of debt.

Use:

• Shows return to equity investors with financing.

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19. CapEx per Unit

Formula:

CapEx per Unit = Total CapEx ÷ Units

Use:

• Helps gauge renovation intensity and costs per unit.