Understanding the Terms of Commercial Real Estate

Buying property, commercial or residential is a wise investment but only if you know the pros and cons of the industry. To win at the investment game for Commercial real estate you need to know the language. Understanding the terms of commercial property provide you negotiating leverage to get the most out of your investment.

Commercial Property or Real Estate consists of:

• Warehouses

• Retail buildings

• Industrial buildings

• Apartment buildings

• Office buildings

As a general rule commercial property tends to yield a larger financial reward over residential property (rental property or single-family homes) but also involves a greater risk. Here are some basic terms of commercial real estate:

• Loan to Value – The amount calculated in percentage form when determining the loan

• Underwriting – Financial analysis of real estate investment

• Acquisition – The purchasing of the property

• Capital Expenditure – Monies used to upgrade physical assets aside from maintenance and normal repairs

• Cash-on-Cash Return – How long it takes for an investor to receive the return on his money.  The  investor’s return comes from calculating the property cash flow divided by the amount of money invested in the asset. Calculated on a yearly basis, the return is in the form of a percentage

• Break-Even – (Also referred to as function of occupancy) When the income equals the expenses of the real estate property

• Debt-Coverage-Ratio – The cash flow ratio before loan payments in proportion to the loan payments. It is standard procedure in the industry to use this ratio to determine how much lenders will give on investment real estate

• Net Worth – The amount the individual’s assets which exceed their liabilities

• Liquidity – The level the security converts to cash

As with any asset it is important to weigh the pros and cons to determine if it is a worthwhile investment. A few you may consider might be:


• Income potential

• Limited hours of operation

• Objective Price Evaluations of Property

• Greater Lease Term Flexibility


• Time Commitment

• Requirement of Employees

• Larger initial Investment

• Higher amount of Risk

Commercial real estate is a lucrative investment but only if you understand the language and terms. Weighing the pros and cons will help you avoid financial pitfalls and whether this is the best type of investment for you.

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