Frequently Used Terms in the Commercial Real Estate

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Investing in the commercial real estate is always considered lucrative which is the reason behind many people getting attracted towards investing in it. However, if you are planning on investing in the commercial real estate, then there are certain terms used in this sector that you should get yourself acquainted with. This will help you to understand the functioning of the commercial real estate sector easily. Go through the slide to get yourself acquainted with the most frequently used terms in the commercial real estate.

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Frequently Used Terms in the Commercial Real Estate

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When you are planning to invest in commercial real estate, then you should first understand the terms related to it.

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Several terms are involved in every commercial real estate investments that are important to be aware of.

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You need to carefully understand all the terms associated with the commercial property that you are looking to purchase.

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Here are the frequently used commercial real estate terms which you need to understand before taking any investment related decisions. Net operating income Return on investment Capitalization rate Price per unit Relationships

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Net operating income

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The first and most popular real estate term is the net operating income which is the main factor of every commercial real estate deal.

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The net operating income is calculated by subtracting your expenses from the gross rental income of your commercial property.

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Here, the expenses do not include the mortgage payments or depreciation for calculating the net operating income.

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If the NOI increases, the property value will increase as well and if the NOI goes down, the property value also goes down.

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Return on investment

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Return on investment is another important term in commercial real estate investment because it refers to the money coming out from your investment property.

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The ROI of your commercial real estate is calculated by dividing your annual cash flow with the down payments. Annual cash flow Down payments Return on investment (ROI)

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The time required for raising the capital of your commercial real estate property, determines how fast is your money coming out of the investment.

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Capitalization rate

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If you look at the real estate properties as a whole, then capitalization rate is mostly used in the commercial real estate industries.

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The capitalization rate is similar to the net operating income and is calculated by dividing it with the sale price.

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Thus, the capitalization rate is generally used to measure the performance of the building without considering the mortgage financing.

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If you have already paid the whole amount for your commercial property, then the capitalization rate defines the return on investment of that property.

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Price per unit

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Before investing in commercial properties, you need to determine the worth of the property and what to offer when you’re considering to it.

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Price per unit and the price per square feet basically allow you to calculate the price you are going to pay for the whole commercial property.

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It is helpful for the investors to gauge their offer prices as well as protect them from their overpay deals.

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However, you can also use the price per unit and price per square foot to determine the value of apartments, retail centers, office buildings, etc.

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Relationships

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Relationship is probably the most important term for the property in the commercial real estate market because it is a relationship based business.

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It will help you to convince the property seller or the brokers to work with you instead of other and send you their off-market deals.

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By maintaining a good relationship with the seller, you will get the best deals for your commercial real estate investments.

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In this way, you can work with the seller by understanding their needs and property selling motives.

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