So, let’s take a look at the commonly referred to metrics in the world of CRE:
Gross Rent Multiplier – This simple equation divides a property’s price by its annual gross rent. This number offers a quick value assessment in order to determine if further evaluation is in order.
Capitalization Rate (Cap) – This all-important number is derived from dividing a property’s price into its Net Operating Income (income after operating expenses such as taxes, utilities, insurance, maintenance and management). And don’t forget to include 10 percent of your total annual rental income to the costs associated with potential vacancies. The property’s price is the total cost of acquisition and includes closing costs, brokerage fees and renovation costs. It tells you, as an investor, the property’s ability to recoup your initial investment and start bringing in a profit. An example: An office building costs $130,000. The monthly rent you can expect to receive from your tenants is $1,300. This leads to an annual capitalization rate of $15,600 / $130,000 = .12 or 2 percent. What do most investors consider an ideal Cap rate? Depending on the market, it may fall anywhere from 7 to 10 percent.
Cash-on-Cash Return – Also called the equity dividend rate, this metric is determined by dividing the net cash flow, or net operating income before taxes, by the total amount of cash invested (down payment, renovation costs, closing and loan fees). The net operating income (NOI) is the annual rental income minus the operating expenses. Cash-on-cash return helps investors perform a quick analysis to determine both possible cash flow as well as if a property is undervalued. Here’s an example: You purchased a multifamily unit for $1,500,000 with a down payment of $300,000 and no rehab required. The monthly cash flow from rentals after expenses, including mortgage payments or debt service, is $4,000; therefore, your yearly income before taxes is $48,000. $48,000/$300,000 = .16 or a 16 percent cash-on-cash return. Some investors will consider a property with an 8 percent cash-on-cash return while others will not consider a property unless it yields a 20 percent cash-on-cash return.
You’ve got your numbers and metrics in order, it’s time to find funding for your CRE investment. This will be determined by your experience in the particular market, your down payment, debt and loan-to-value ratios, as well as credit history and worthiness. For many starting out, one or all of these factors can make obtaining a commercial loan seemingly impossible.
These investors provide hard money commercial loans and, because they are private investors, they are not under the same stringent underwriting requirements as banks and credit unions. Call us today for a no-obligation quote. When other lending institutions have said “No,” we can often find a way to say “Yes!”
Level 4 Funding LLC Private Hard Money Lender
Arizona Tel: (623) 582-4444
Texas Tel: (512) 516-1177
Dennis@level4funding.com NMLS 1057378 | AZMB 0923961 | MLO 1057378
22601 N 19th Ave Suite 112 | Phoenix | AZ | 85027
111 Congress Ave |Austin | Texas | 78701
About the Author: Dennis has been working in the real estate industry in some capacity for the last 40 years. He purchased his first property when he was just 18 years old. He quickly learned about the amazing investment opportunities provided by trust deed investing and hard money loans. His desire to help others make money in real estate investing led him to specialize in alternative funding for real estate investors who may have trouble getting a traditional bank loan. Dennis is passionate about alternative funding sources and sharing his knowledge with others to help make their dreams come true. Dennis has been married to his wonderful wife for 42 years. They have 2 beautiful daughters 5 amazing grandchildren. Dennis has been an Arizona resident for the past 40 years.