What is Effective Gross Income? Effective gross income is a line item on a real estate proforma that is commonly used by appraisers, investors, and other commercial real estate professionals. Although the effective gross income is easy to understand conceptually, the calculation itself can sometimes be confusing. In this article we’ll take a closer look at effective gross income and clear up any confusion. Effective Gross Income Formula The Effective Gross Income (EGI) formula is defined as the Potential Gross Income for a property minus any vacancy and credit loss. As you can see in the ..read more

The yield on cost is a commonly used metric when evaluating real estate development and value-add projects. It is easy to calculate and is useful as a back of the envelope calculation. In this article we’ll take a closer look at the yield on cost in real estate. Here’s what you’ll learn: What is the Yield on Cost? Yield on Cost Formula How to Calculate Yield on Cost Yield on Cost Calculation: Development Example Yield on Cost Calculation: Value Add Example Yield on Cost for Specific Value Add Projects Yield on Cost and Development Spread Yield on Cost vs Cap Rate Yield on Cost Limitations Wh ..read more

Modern portfolio theory is widely used in the world of finance. In this article we’ll take a closer look at what modern portfolio theory is, review an example calculation, and discuss the assumptions behind the theory. What is Modern Portfolio Theory? Modern portfolio theory (MPT) is widely used in finance and commercial real estate to create investment portfolios that maximize return for a given level of risk, or alternatively, minimize risk for a given level of return. Harry Markowitz is known as the father of Modern Portfolio Theory (MPT). In 1952, While completing his doctoral dissertation ..read more

What is Year Over Year (YOY)? YoY stands for Year over Year and is a type of financial analysis used to compare results from a period of time in one year to the same period of time in the prior year. YoY analysis is widely used in finance and economic analysis and is helpful for quickly understanding growth trends from year to year. YoY Formula The YoY formula is defined as the current year’s value divided by the previous year’s value minus 1: For example, suppose net operating income for a property was 120,000 last year. And the year previous year net operating income was 105,000. In this ca ..read more

What is Gross Income Multiplier The gross income multiplier (GIM) is defined as the ratio between the sale price or value of a property and its gross income from rent and other income sources. The gross income multiplier is a metric used in commercial real estate analysis to compare the income-producing characteristics of properties. It can be calculated using either potential gross income or effective gross income for a property. Gross Income Multiplier Formula The gross income multiplier formula can be calculated using either the potential gross income (PGI) for a property or the effect ..read more

To minimize or defer the tax bill when selling investment real estate, investors commonly use what’s known as a 1031 or Like Kind Exchange. In this article you’ll learn what a 1031 exchange is, how a 1031 exchange works, what the 1031 exchange rules are, the 1031 exchange timeline, and then we’ll cover some frequently asked questions. What is a 1031 Exchange? “1031 Exchange” is a colloquial reference to Section 1031 of the United States Internal Revenue Code (26 U.S.C §1031), which defines the conditions for tax deferral on the sale of real estate.  Specifically, the tax co ..read more

Interpreting interest rates is not always as straightforward as it seems and getting it right can have important implications for all parties involved in a commercial real estate transaction.  Interest rates can take two forms: nominal interest rates and effective interest rates.  As a result, there can be some confusion about what a quoted interest rate actually means. In this article we will take a deep dive into the differences between nominal and effective rates.  We’ll start with the basic intuition behind effective and nominal rates, then walk through the math step by step ..read more

When working with a commercial real estate data set, there are occasions where it is necessary to create a sum for a range of values, but only if they meet certain criteria.  Fortunately, there is an easy way to accomplish this task using a built in Microsoft Excel function known as “SUMIF.” In this article, the SUMIF function is defined, the syntax for using it is described, and its use is demonstrated in a commercial real estate scenario. What is the SUMIF Function? SUMIF is a Microsoft Excel function that allows a user to sum a range of values, but on ..read more

Whether you work at a financial institution, develop real estate, invest in property, or act as a broker, there’s a common thread that binds all facets of the real estate world together.  It’s highly likely that you have one or more financial products like a credit card, debit card, deposit account, car loan, commercial real estate loan, and/or checking account.  Sometimes one or more of these products are held with the same bank, credit union, or issuer.   As it relates to commercial real estate specifically, it is very common for a lender to require a borrower t ..read more

Imagine you are a mid-level manager at a fast growing small business.  As part of the company’s expansion plans, you have been tasked with finding office space in a new city and deciding whether to lease it or purchase it.   Fortunately, there is an objective way to make this decision.  But, it can be a little bit complicated.  In this article, we are going to introduce the key concepts in lease vs. own analysis and apply them with a case study. Lease vs. Own – Reasons for Each For many, buying a property is automatically assumed to be the best choice.  In ma ..read more