hi everyone this is Peter Harris from commercial property advisors and author of this book commercial real estate investing for dummies and coach a mentor to many commercial investors across this nation the subject and title of today's video is called analyzing commercial real estate quickly and easily so let's get started commercial real estate is not as complex as you think it is and in this video I am going to do my best to prove that to you as a commercial estate investor you want to know three things about the deal you're analyzing number one is how much money does it make number two what is your return on investment and number three how does this investment compared to other investments and what I'm going to do I'm going brick though I'm gonna break down those three questions by going over these five key terms here these five terms here are five critical five key investment terms if you are going to invest in commercial real estate these are your guiding principles of investment and they are income and expenses net operating income or sometimes referred to as in a why cash flow cash on cash return and capitalization rates sometimes referred to as a cap rate any expert in a commercial estate will analyze will will gauge the performance of the properties based upon these five key things so if you want to become an expert you also need to know and understand and be aware of these five key terms all right the first one is income and expenses every commercial property that's income producing has income and has expenses income is the lifeblood of any income producing commercial real estate the income could be risk elected it could be lease payments made by the tenants that could be things as laundry income late fees and so forth get the message there what income is expenses are expenses needed or expenses that the property incurs to operate the property we call the operational expenses they are insurance taxes utilities repairs and maintenance landscaping proper measured fees and the list goes on now one thing that is not included in operational expenses is the mortgage expense the mortgage expense is not cluded is not included as an operational expense in a commercial property it is a separate category is in a category of a debt expense so we will not include it when we speak of income and expenses for commercial property we will deal with the mortgage payments to debt expense and in number three here okay we have a clear understanding of income expense now net operating income net operating income is one of the most important terms of these five and the reason why is as your net operating income goes up not only does your cash flow goes up but also the value of the property and conversely when the net operating income goes down so does the cash flow and so does their property value now I'm going to write down for you the the definition of net operating income is very simple basically it is your income - excuse me there all right net operating income equals income minus expenses income minus expenses now let's say for example that you collected $4,000 in rents for one month and you have approximately a thousand dollars in expenses so do the math four thousand minus one thousand is three thousand dollars that three thousand dollars is what we call your net operating income now will people get confused with is they get confused with net operating income and income or gross income up here or rental income these are two different things your net operating income is your income after you subtract your expenses okay that's the main difference again this is probably the most important term out of these five for you to remember okay next is cash flow cash flow is very simple as well cash flow is king in any income producing commercial property the definition of cash flow is also very simple cash flow is your NY your net operating income minus your mortgage payments very simple cash flow equals your Noi - your mortgage payments all right next is cash on cash return all right this is one of my favourite terms here and the reason why is I associate cash or cash attorney with the velocity of money how fast my money is moving for example if you have $20,000 you're going to invest into a properties of down payment the question you need to ask yourself is how fast can I get back my $20,000 that's how that's how fast your money is moving now if you can invest your $20,000 and get it back within 12 months you know one year that's considered a 100% cash-on-cash return if you can get the money returned back in two years that's a 50% return cash-on-cash return three years 33% cash on cash return four years 25% cash on cash return and so on I think you get the picture there cash or cash your turn the equation there is your your annual cash flow divide it by your down payment okay cash or cash return is basically your return on investment if you look at this equation your annual cash flow divided by your down payment in a couple minutes I'm going to give you an example I'm going to use all five of these in an example and break it down for you there's nothing like learning by doing okay that's capturing cash return in the commercial real estate we can produce phenomenal cash and cash returns if you were to take your $20,000 and you go to your local bank and deposit it there and for one to three years with a CD let's say the it's a one to three year CD and the banks will probably give you max one percent that's about 200 dollars a year in commercial real estate we can do ten twenty times that and most of times tax-free alright something that a CD can't do for you that's the benefit of commercial real estate all right next is capitalization rate capitalization rate are sometimes we call the cap rate for short is an industry wide use term part of being an expert in commercial is understanding what a cap rate is and how it pertains to East property and neighborhood each neighborhood is stamped with a certain cap rate here is the equation for the cap rate cap rate as simple as well it's your noi divided by the sales price okay Noy divided by the sales price is the cap rate another way of looking at cap rate from a layman's point of view is is if you were to pay all cash for your investment and what will be the return on that investment for example you saw a $500,000 strip Center down the street you want to buy it you wrote a check for five two thousand dollars you bought it there's no mortgage involved how much what is the return on that five hundred thousand dollars you've spent that's what the cap rate is now cap rate can be used in many different ways that's why I really want you to research and really understand cap rate and I'm going to do a quick example for you too but a cap rate a high cap rate will be in a a high cap rate property we're probably in a neighborhood that's not as good maybe a low to moderate income neighborhood so the higher the cap rate that higher the risk the higher potential return but also lower the price okay let me repeat that the higher you go in the cap rate the higher the risk gives you're in a not-so-good neighborhood the higher the potential return but the price is lower all right now conversely when you have a very low cap rate what happens is you're probably in it in a much better neighborhood a wealthy neighborhood and so in the Laurie goal in a cap rate the lower the risk the lower return but higher the price you got it okay now now that you really understand I have a understanding what these five are what I'm going to do next is I'm going to give you rule engagement for these five terms okay so here's how here are rules of engagement for these guiding principles for these five key terms that every commercial investor should be aware of alright basically do not make an offer do not come to a conclusion of how a commercial property performs until you understand and can calculate each of these five all right I'm going to give the right Nelson rules of engagement for income and expenses is very simple we need the income to be greater than the expenses okay that's the rule there on the net operating income what we need here is we need your net operating income to be greater than your mortgage payments okay that's the rule for that one for a cash flow very simple we need your cash flow to be positive positive cash flow cash or cash return very simple - cash or cash return must be greater than or equal to or greater than ten percent okay on your cap rate I'll keep it simple as well cap rate should be greater than or equal to eight percent all right so now you have guiding principles when you're analyzing a income producing piece of commercial estate you know how things should flow and you should know what your guiding principles are okay now what I want to do next is to make all this makes sense for you I want to do a quick example for you and implement all five of these key terms okay okay now I'm going to do a quick example for you I'm going to implement all five of these terms in to deal I'm going to make three assumptions for for simplicity sake those assumptions are on this property the purchase price is $450,000 I'm going to put down 25% which is 100 $12,500 and my mortgage payments per year are going to be $20,000 okay so I'm making three these three assumptions on this deal now I'm going to take this information and apply it here okay so let's say for example you know that the purchase price is four to fifty you know it was doubt payments going to be twenty five percent and you know you can do your confidence in the mortgage and find out what the payments are per year okay let's assume you have those three pieces information from there we're going to do the rest okay so on this property the income is 40 income is $48,000 per year okay and the expenses are $12,000 per year okay and this the income expenses are information you get from the broker you get from the seller you can get on an income expense statement so that's given alright so you don't assume anything here you get this is hard information from a reliable source all right now to calculate your net operating income on this deal remember that your net operating income was your income minus expenses so income minus expenses so 48 thousand minus twelve thousand is thirty year so I have my net operating income next is cashflow remember a cash flow is your net operating income minus your mortgage payments net a net operating income minus your mortgage payments so $36,000 - twenty thousand dollars is $16,000 a year okay follow me so far alright next is your cash on cash return the velocity of money your return on investment if you recall your cash your cash return with your annual down payment I'm sorry your annual cash flow divided by your down payment so your annual cash flow of 16,000 divided by your gal payment of a hundred twelve thousand dollars that's fourteen percent all right all right so you capture cash return is fourteen percent your cap rate next your cap rate again is if you were to pay all cash for your investment what would that return investment B cap rate if you call is your in a Y divided by your sales price so Noi divided by the sales price okay so I do thirty six thousand divided by four to fifty thousand I get eight percent all right okay so these five now we just discovered now was that too difficult to do I don't think it was alright now these five things again anyone that's considered an expert when they analyze any property they will go through all five of these things and so should you alright so now that you have those let's go out let's practice let's go do some get some deals down here all right so now if you want more resources like this please go to our website commercial property advisors comm or simply subscribe to this YouTube channel okay so that ends today's video on analyzing commercial real estate quickly and easily I'll see you next time
