7 Essential Commercial Mortgage Vocabulary Terms

Getting started in the commercial mortgage market can be daunting if you are not familiar with the jargon. In order to be a savvy commercial real estate investor, you first need to learn the lingo. Here are seven of the most important terms used in commercial mortgage discussions:

1. Gross Income

This is the total amount of money the commercial property will bring in. It includes rent as well as things like late fees or laundry or vending machine revenue.

2. Effective Gross Income

This factors in how having empty apartments or tenant spaces will affect the gross income. The effective gross income is what is left over after subtracting the vacancy rate from gross income.

3. Vacancy Rate

This is how many units in the commercial property are vacant compared to the total number of units and helps you to know effectively and efficiently the building is being used. To calculate the vacancy rate, divide the number of empty units by the total number of units.

4. Operating Expenses

This includes all costs associated with maintaining the property like taxes, insurance, utilities and grounds upkeep. It does not take into account mortgage principal or interest.

5. Net Operating Income (NOI)

This gives you the bottom line of a property. It measures your profit after paying all the operating expenses. It is calculated by subtracting total operating expenses from the effective gross income. This is an essential number to help you determine whether a commercial real estate purchase will be worth your money or not.

6. Capitalization Rate

Similar to the NOI, the capitalization rate, or cap rate, tell you if a property is properly priced. It is a product of the net operating income divided by the sales price. The cap rate does not include any commercial mortgage data.

7. Cash-on-Cash Return

This is how long it will take you to earn back your down payment and is calculated by dividing the annual cash flow by the down payment.

These essential terms will help you feel more confident in your interactions with your commercial real estate broker and in your own valuations of properties, ultimately leading you to better investments.

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