CRE Calculator Tutorial

CRE Calculator is a commercial investing calculator and an invaluable tool for investors and brokers alike. When used effectively, the CRE Calculator can help you plan ahead with your commercial property investments. An in-depth reading of the results can reveal when the best time to sell would be, areas where building expenses could be trimmed back, and many other insights that will create the best return on your commercial investment.

Step 1:

The IPV Calculator relies on a short, seven step process to supply you with a ten-year plan for your commercial property. To start, answer the question, “What type of investor are you?”

Are you looking to buy or sell your property?

Next, you’ll specify the Property Type of your building. If you’re unsure, you can learn more about the five general property types here.

Different commercial real estate property types require different information to give you an accurate reflection of their worth. So it’s important to specify the correct type! The expenses for a multifamily apartment will be very different than those of an office property. As will the type of lease you have established with the tenants.

That’s it for Step 1 of the IPV Calculator! Pretty simple. When you’re ready for Step 2, hit “Go to next step” to continue valuing your property in the commercial investing calculator.

Step 2:

The second step in the Investment Property Valuation Calculator is all about income! Here, you’ll discover how much Gross Income your property is bringing in. Gross Income is the total amount of money you are making, before deducting taxes and expenses.

It’s important to enter in as much data as you have on income, including individual tenant’s rent. The more information you can provide, the more in-depth analysis you’ll have of your property’s worth.

If you do not have the information readily available, or you have many, many tenants, you have the option to skip individual entries and enter the single lump sum of your building’s income.

Feel free to enter income number you most readily know. If you enter in your total monthly income, the commercial investing calculator will automatically calculate your annual income. This also works in reverse if you enter your annual income first.

Property Income refers to “income received by virtue of owning property.” The three forms of property income are rent—received from the ownership of natural resources; interest—received by virtue of owning financial assets; and profit—received from the ownership of capital equipment.

The Property Square Footage is the amount of space your property takes up. A square foot is defined as the area of a square with sides of 1 foot in length.

Vacancy Rate can be tricky. The vacancy rate refers to “the percentage of all available units in a rental property, such as a hotel or apartment complex, that are vacant or unoccupied at a particular time.” For example, if you have a four unit apartment, and a tenant moves out of one unit, your vacancy rate is 25%.

For the IPV Calculator, we recommend entering in the average property’s vacancy rate in your market. This number can swing drastically in different directions based on your property type and location, so expect to do some research. If you’re unsure, contact a local commercial real estate broker. They will be happy to help you out!

When you’ve entered all the figures you can, hit “Go to next step” to continue valuing your property with the commercial investing calculator.

Step 3:

In Step 3, you’ll break down the expenses it takes to run and maintain your property. This will provide you with a better idea of how much each charge is cutting into your profit and where you could potentially save money.

There are typically two types of leases when dealing with commercial real estate, Gross Lease and Triple Net Lease (NNN). If a Triple Net Lease has been signed, the tenant agrees to take on the full extent of the building’s expenses. They will cover taxes, insurance, maintenance and nearly every billable item.

With a Gross Lease, it is the landlord who is responsible for paying the majority of the building’s expenses. The tenants pay a singular rate throughout the year.

Click here to learn more about the two types of leases.

As with income, we recommend you fill put as many details as possible into the commercial investing calculator for your building’s expenses. Every expense you input will lead to a more comprehensive view of your property and allow you to more strategically outline your future plans for it.

The Investment Property Valuation Calculator automatically creates fields for some of the most common expenses, but you are free to create delete or create your own depending on your property’s unique needs.

If you are unsure of your property’s various expenses, there is the option to enter the total lump sum of your building’s cost. This will result in a less detailed, but still functional final report.

When you’ve entered all the expenses you know, hit “Go to next step” to continue valuing your property with the commercial investing calculator.

Step 4:

In Step 4 of the IPV Calculator, you’ll focus on valuing your commercial real estate property. You’ll advance from this step with a better understanding of what your building is worth and an estimation of its Cap Rate.

Before you begin, it’s useful to understand a couple terms. First Net Operating Income (or NOI) is a calculation used to determine the profitability of a property. NOI is determined by adding all revenue generated from the property (rent, parking, etc) minus all reasonably necessary operating expenses (insurance, repairs, etc.)

Capitalization (Cap) Rate is a little more complicated to figure out. A cap rate is the rate of return anticipated for one year if the property was paid for in cash — it’s the ratio between the NOI and the property value. It is determined by evaluating the financial data of similar properties which have recently sold in a specific market. The cap rate calculation incorporates a property’s selling price, gross rents, non rental income, vacancy amount and operating expenses.

Generally, buyers are interested in properties with a higher cap rate, while sellers want their cap rate to be low. You can use the slider at the bottom of the page to see how the cap rate affects the value of your property. As the cap rate goes up, your property’s value goes down.

If you’d like to learn more about cap rates, read out article for a more comprehensive explanation. Alternatively, use MyNOI’s Local Cap Rate tool to get an idea of what the cap rates may be in your area.

When you’ve entered all the values you can, hit “Go to next step” to continue valuing your property in the commercial investing calculator.

Step 5:

In Step 5 of the IPV Calculator, we’ll perform a financial analysis and take a look at the debt you’ll be incurring by investing in a commercial property.

The first information you’ll be asked for is the down payment and loan amount.

The down payment is the amount of money a buyer needs to pay up front before they can sign the building contract. Most property owners expect some form of down payment as a way to prove buyers have the capital to afford making monthly mortgage payments. The loan amount is simply how much money you’ll be borrowing to purchase the property.

After the down payment and loan amount, you’ll fill in information on Interest RateAmortization Period, and Monthly Payment.

The interest rate is the percent charged for borrowing assets. If the bank loaned you money, they make a profit from it by charging you an interest rate based on the total still owed.

An amortization period is the amount of time it will take you pay off the debt with fixed monthly installments. The calculator will then crunch your expected monthly payments based off the total loan and how long you will be paying it off. The finished Investment Property Valuation Calculator report will detail how much you will have left to pay off every month.

The final slots for Step 5, Annual Debt Service and Debt Coverage Ratio (DCR), are automatically calculated for you if all the above information has been filled out.

Your annual debt service is simply how much money you will need to generate yearly to cover both your repayment loans and the interest on top of them. The debt coverage ratio is determined by dividing the NOI by the debt service. Or to put it simply, how much you’ll be making by how much you’ll owe. Typically, a bank with require a DCR of 1%> before loaning you any money, as that signifies your property will generate a positive cash flow.

When you’ve entered all the values you can, hit “Go to next step” to continue valuing your property in the commercial investing calculator.

Step 6:

In the sixth step, investors will examine the cash flow of their property. It’s a short step that asks buyers to enter or estimate the average percentage growth of their income and expenses in order to help you better understand the long-term health of your property.

Step 6 is the final section before your ten-year report is calculated by the commercial investing calculator. In this phase, we’ll focus on the estimated annual growth of your income and expenses.

As time goes on, it’s likely the income and expenses your building generates will grow. To ensure you receive an accurate ten-year forecast, it’s necessary to know how much each will be growing by. Enter the best estimation of growth you have into the proper boxes. If you’re unsure of what the rate may look like, contact a local broker and ask for the numbers on similar properties in the same sector and area.

The Cap Rate at Sale box will automatically populate itself based on the information you’ve given in previous sections. If you need a reminder of what cap rate is, read our article.

When you’ve entered all the values you can, hit “Go to next step” to see your ten-year property forecast report.

Step 7:

The final step of the IPV Calculator is a summation of everything you’ve entered before. Investors can see a ten-year forecast of their commercial property, along with information on their loans. This handy report can act as a loose guide on investments and provide you with a direction concerning where to put your money.

You’re familiar with many of these terms already from previous steps, but we’ll detail some of the new ones you may not recognize.

The Net Cash Flow is the money that remains after expenses and loan repayments have been taken out of your revenue.

Cash on Cash Return is a common way in the real estate industry of looking at your returns. It is calculated by dividing your cash flow by the amount of your total investment.

Principal Reduction is the amount of money you will have paid off that year toward your loan. With Cumulative Principal Reduction showing you the total sum of your payments so far.

The final report also lists how your loan payments will play out over the entire amortization period. Each month is detailed with how much you will be paying, the interest you’re paying on it, and the cumulative payments made so far.

To receive a PDF of the final report, click the “Email Me Results” and enter your email address.

From this final step, you can go back and edit any of the previous numbers you put in to see how they may affect the outcome of your property. Try lowering the interest rate to see how much .2% could save you over 30 years. Or experiment with rent prices to find the happiest medium between satisfied tenants and sufficient cash flow.