BLOG POST: Common Metrics for Valuing Real Estate

real estate valuation metrics

Common Metrics for Valuing Real Estate

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There are a few common metrics we want to explain to a budding real estate investor, or someone interested in evaluating the complexion of REIT portfolios.

NOI / Net operating income
This is a very straightforward income.  This is just the income from the building (rents) minus the operating expenses (management staff, bookkeeping, cost of finding tenants, etc).  This does not include financial expenses depreciation, or interest expenses.  As such, it is very similar to an EBITDA.

Cap Rate
Many people think of real estate as bond-like, and one of the most important factors to consider is the interest-rate like component of real estate – namely the amount you earn each year from rent.  As such, on of most commonly used metrics in real estate, the capitalization (cap) rate ratio between net operating income of a property and its value.

A very high quality building will have a low cap rate, and a lower quality or riskier building will be valued with a higher cap rate.

PSF: Price per Square foot, RSF: Revenue per Square Foot
The price per square foot, is the price of the building divided by the total square footage of the building.

Revenue per square foot is defined analogously for retail businesses and restaurants.  Revenue per square which will be very different depending on a tenant’s industry is often an important indicator of tenant health in consideration in buying a retail space.

NNN: Triple Net / NN Double Net / Net & Gross Lease:
There are several different types of leases.  In a gross lease, the landlord is responsible for upkeep around the property, taxes, insurance and maybe even utility payments.  In a net lease, the tenant retains some of the cost – generally maintenance.

Many times, you will see triple net leases, and occasionally double net leases where the tenant is responsible for all the maintenance, tax costs, insurance and utilities.  The landlord may have some remaining responsibilities – say the roof and structure, but by and large, the landlord can focus on being a financial owner rather than an operator of the property.

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