09 May Commercial Real Estate Glossary
Working list of Commercial Real Estate Terms, primarily for investing in apartment buildings.
Cap Rate – net operating income divided by price of the apartment building. For example, Gross Income is $384,000, less 3% vacancy, less expenses of $141,844, gives us a net operating income of $230,636. Divide the net operating income of $230,636 by asking price of $5,020,000 and you get a 4.59% cap rate.
Gross Rent Multiplier (GRM) – price divided by gross income. For example, the Price of $5,020,000 divided by $384,000 equals a GRM of 13.07.
Debt Coverage Ration (DCR) – a ratio the lender looks at to determine if the net income will cover the loan payment and leave a conservative buffer. At the time of this writing, the DCR most banks use is 1.20. Here’s an example; Gross Income is $384,000, minus 3% vacancy of $11,520, minus expenses of $141,844 equals $230,636 in net income. With a loan payment of $180,585 annually divided by the net income gives us a DCR of 1.28, which means the bank will loan up to approximately 50% of the $5,020,00 asking price of the apartment building.
Loan To Value (LTV) – the is the percentage of loan of the value. In the example above, the LTV was 50%, the loan was 50% of the value of the building or $2,510,000 of a $5,020,000 loan.