Owning commercial property can be very lucrative. However, commercial real estate transactions are complex. It is, therefore, wise to hire a commercial real estate lawyer and an accountant for such transactions.
While a commercial real estate lawyer can help you navigate the complexities of a transaction of a purchase and sale, it’s crucial to familiarize yourself with some accounting terms when investing in commercial real estate.
Accounting terms you need to know
The following are accounting terms you should know before making any investment decisions:
- Net operating income (NOI)
The net operating income is the total income of a revenue-generating real estate investment less the total operating expenses. It helps investors determine the profitability of a property before making an investment decision.
NOI doesn’t include mortgage payments and depreciation, only expenses. As NOI increases, so does the value of the property. If the NOI declines, so does the value of the property.
- Capitalization rate
The capitalization rate, also referred to as the cap rate, is the annual rate of return expected to be generated from a real estate investment. It’s a measure of a property’s performance and profitability. The cap rate helps buyers determine their anticipated return on investment before factoring in mortgage financing. It’s an important metric because it assesses how much income may be generated from the property annually.
The higher the capitalization rate, the better it is for you as an investor.
- Cash flow
Cash flow is the amount you pocket at the end of every month after all the operating expenses have been paid. If you spend less money than you make, your cash flow will be positive, and if you spend more money than you make, your cash flow will be negative.
Being assured of consistent monthly rental income is one of the reasons people opt to invest in real estate. A possible investment property should ideally have a positive cash flow.
- Cash-on-cash return
Cash-on-cash return is the ratio of the annual pre-tax cash flow to the total amount invested. It’s expressed as a percentage. It measures the annual return to how much money you invested in the property.
- Usable square footage (USF)
Usable square footage is the amount of space that is available for use in a commercial property. There are spaces such as bathrooms, stairways, and hallways that aren’t usable. The USF gives you an accurate measure of how much usable space a property has.
- Rentable square footage (RSF)
Rentable square footage is the total amount of space in your property, including any shared areas. Landlords use this measurement to determine the rental amount of the property.
Commercial real estate lawyer in Oakville
If you’re planning on investing in commercial real estate in Oakville, contact us at Anna Gurevich Law. Our commercial real estate lawyer has immense experience handling commercial real estate matters and can guide you through the process.
Visit or call our office today to schedule a consultation.