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What is the formula for evaluating commercial Real Estate?
There are two formulas that are instrumental in evaluating commercial real estate deals. You will first want to determine the Net Operating Income (NOI) which can be calculated by subtracting the Gross Income from Operating Expenses (Gross Income - Operating Expenses = NOI). The formula will determine cap rate. It can be calculated by taking the Net Operating Income (NOI), dividing it by the sales price ($125,000/ $1,125,000 = 11.1% cap rate). The cap rate tells you the projected return for one year if you paid cash for the property. If you are financing the deal, that will have to be taken into account as well. |
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