How to Evaluate Commercial Real Estate - What is CAP Rate, NOI

Six Metrics to help you evaulate real estate deals: Cap Rate, DCR, NOI, COC, IRR, Cash Flow Investment Metrics for Flip House and commercial deals Must Know.

Every investor should know and use to evaluate potential purchases. Let's start with something easy.

1. NOI - Net Operating Income This will indicate the Income after operating expenses which excludes debt service. • Total Rent (Revenue) subtract the Operating Expenses This is important because it tells your overal income and used in Cap Rate.

2. CAP Rate, kinda like you return on investment • NOI divide by purchase price or property value) To me this is one of the most important metrics to use although the factors to calculate this metrics need to be very accurate as the metric will be as good as is inputs.

3. DCR - Debt Coverage Ratio When you pay mortgage on a loan, this metrics measures how well the NOI can cover this monthly debt • DCR is the ratio of NOI to the monthly debt payment • The target must be at least 1.0 otherwise you have no money left after paying the debt

4. Cashflow Cash remaining so its NOI subtract this mortgage NOI subtract debt No target but you need to have a perspective of how big the deal is for example: • Cash flow of $1000 a month on a $1M investment is much different versus $1000 on a $10M investment

5. Cash-on-Cash Similar to cap rate but only on the flow of actual money paid or received. • Cashflow / Cash investment • Target 10% - 20%+ This is how much returns are getting on the money you and your investors put in.

6. IRR - Internal Rate of Return https://www.investopedia.com/terms/i/... IRR must be calculated using a software program. It is to compare different projects/real estate property or investments and rank them by their IRR (higher is better). You can think of it as what rate of return would this investment generate over a set period of time and using the projected investment at cash flows.