Master These Commercial Real Estate Terms to Protect Your Investments and Maximize Profit
If you’re considering commercial real estate investing or already have a few deals under your belt, one thing is certain — the numbers matter. But here’s the problem: the biggest reason many commercial properties fail isn’t the tenants or the neighborhood — it’s because investors underestimate operating expenses.
This guide will break down important commercial real estate terms in plain English so you know exactly what to look out for. Because when it comes to commercial property? The Latin phrase Caveat Emptor — "Buyer Beware" — couldn’t be more true.
Why You Must Do Your Own Research (and Not Rely on the Seller)
Operating expenses can vary up to 30% between states. The same building in two different locations could have wildly different costs just because of taxes, insurance, or utilities.
Bottom line: Do. Your. Own. Research. Don’t trust the seller’s numbers. Double-check everything, especially expenses.
The Must-Know Income and Expense Terms
Gross Rental Income (GRI)
Your starting number — rent collected over a year if every unit is rented all the time.
Vacancy Factor
No building is 100% full all year. Smart investors assume a 5% vacancy rate for multifamily. Build this into your numbers.
Effective Gross Income (EGI)
Your GRI minus that vacancy buffer. This gives you a realistic income number.
Operating Expenses (OpEx)
These are the day-to-day costs of running the property — taxes, insurance, maintenance, management, utilities, repairs, even bookkeeping.
Pro Tip
Sellers often lowball these numbers. Always verify.
Capital Expenses (CapEx)
Big-ticket improvements — roofs, parking lots, plumbing upgrades. If you plan to renovate, get bids upfront.
Net Operating Income (NOI)
Your EGI minus OpEx. This is the number lenders and buyers care about.
The Financing Terms Investors Should Know
Annual Debt Service (ADS): Think of this like your mortgage payment — total loan payments for the year.
Cash Flow (CF)
Your real profit — NOI minus debt payments. This is what hits your bank account.
Cash-on-Cash Return
How much you make based on your actual cash invested — a critical number to compare deals.
Advanced Metrics Lenders Love (And You Should Too)
Capitalization Rate (Cap Rate)
The return you’re getting on the property based on income and purchase price. A great quick way to compare deals.
Debt Coverage Ratio (DCR)
Lenders use this to make sure the property’s income covers the loan. 1.25 DCR is standard. Anything less is risky.
Multifamily Property Classes: A, B, C — Know the Difference
Class A: Newer, upscale buildings in the best locations. High rents, low risk — but pricey.
Class B: Solid, well-maintained properties with middle-income tenants. Some renovation potential.
Class C: Older buildings, often in rougher areas. Higher risk, but great value-add opportunity if you know what you’re doing.
How to Compare Deals Like a Pro
Use these two tools:
Price per Door — Great for comparing multifamily properties.
Price per Square Foot — Ideal for retail, office, or industrial.
