When investing in commercial real estate, or becoming a real estate developer there are many things you need to be aware of. Here are some helpful vocabulary terms that will ensure you know the most you can about real estate investing companies.
Gross Income
By definition, gross income is the total amount of income generated by your property annually. This is assuming that your property is fully occupied all 12 months, and this is the base amount of money the property will bring in before you take your portion or before taxes are implemented.
Here is an example:
If you are looking at a five unit apartment complex that can fit two people per unit. You are choosing to rent it for $600 a month.
5 Units x $600 a month = $3,000 a month in rental income.
$3,000 a month rental income x 12 months = $36,000 gross income.
So, in this case the maximum amount of income your apartment complex can bring in would be $36,000.
Vacancy Rate
This rate is percentage of units that are empty in comparison to the total amount of units owned. Figuring this out is easy, as the formula is simply :
amount of empty units divided by the number of total units.
Go back to your apartment building:
If you have 3 vacant units in a building of five, the vacancy rate would be 60%.
Effective Gross Income (EGI)
This number is used as the standard when determining the earning potential for a unit. You find this by :
Gross income – vacancy rate – credit loss.
Credit loss can be anything from eviction costs to parking fees per unit.
Net Operating Income (NOI)
Simply put, the NOI is the annual income generated by all income-producing properties while deducting expenses occurred from different operations. The formula is:
Gross Income – Effective Gross Income + Effective Rental Income – operating expenses.
The end result will measure a unit’s ability to produce a steady income.
If done correctly, commercial real estate can be a very lucrative business. Commercial real estate developers are able to make profits from buildings that are failing, and with help from real estate investments companies they can have a successful career. Start yours today!