If you work with commercial real estate professionals, you have probably noticed that we speak in a special language of abbreviations and acronyms. Newcomers to the industry take their time wading through the sea of letters, googling behind the scenes to keep up with the lingo. Our new series, CRE Abbreviations Breakdown will do the work for you!
This week we are moving into the Investment Edition of CRE Abbreviations, which include common data points that are used to quickly measure a deal’s viability amid our team’s criteria.
CAP
Capitalization Rate
CAP is referred to as the rate of return that is expected to be generated on an investment property. CAP rates are measured based on the net income that the property is expected to generate. They are calculated by dividing net operating income by property value and presented as a percentage. They estimate the investor’s potential return on their investment.
CAGR
Compound Annual Growth Rate
CAGR is the average rate at which the rent increases year over year. It is often used to measure and compare the past performance of investments or to project their expected future returns.
IRR
Internal Rate of Return
IRR is a metric used to estimate the profitability of potential investments. While CAGR simply uses the beginning and ending value, IRR considers multiple cash flows and periods. The higher the IRR, the more desirable the investment.
NOI
Net Operating Income
NOI calculates the profitability of income-generating real estate investments. NOI equals all revenue from the property, minus all reasonably necessary operating expenses. To calculate NOI, subtract all operating expenses incurred on a property from all revenue generated on the property. NOI will indicate to a property owner if leasing a property is worth the expense of owning and maintaining it.
Take a look back at our last CRE Abbreviations Breakdown articles on Brokerage.
