In commercial lending, whether hard money commercial loans or conventional, it is important to understand and know how to evaluate the income of a commercial property. Below I will outline some of the fundamentals to help you evaluate a commercial properties income.
There are two basics for evaluating income on a commercial piece of property. The two basics are contract rent and market rent. Contract rent is the actual rent collected per the lease or rental agreements. Market rent is what would be paid for your space if you were to rent it on the open real estate market, and is based on current rents for comparable space, substantiated by an appraiser and/or rent surveys for the property.
Using the contract rents for space currently rented, and market rents for vacant space, you can then figure out the effective gross income (EGI), net operating income (NOI) and the debt coverage ratio (DCR). These are all very important numbers to know how to calculate when talking about commercial loans.
To figure these numbers, you also will need to know the operating expenses (OE), and the annual debt service (ADS). For a more in depth discussion on how to calculate these figures, please read the rest of this article, Commercial Lending - Evaluating Income on a Commercial Property.
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