EP339: The Most Important Commercial Real Estate Terms a Newbie Should Know

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What if we told you that 90 percent of people who try commercial real estate investing fail within their first year—not because they don’t have money, not because they pick bad properties—but because they literally don’t speak the language?

In the next few minutes, we’ll decode the complete commercial real-estate vocabulary that separates amateurs from millionaires—so you can walk into any broker meeting sounding like you belong at the table.

Most people think real estate investing is simple: buy low, sell high, collect rent checks.

But commercial real estate? It’s a completely different game—with different rules, different players, and its own language.

We manage over $400 million in multifamily assets, and trust us—if you can’t speak the language, you’ll miss opportunities that could’ve made you millions.

We’ll take you through the four critical phases of every commercial deal ⏬

Pre-Acquisition, Under Contract, During Ownership, and Exit Strategy.

Each phase has key terms that can make—or cost—you millions.”

🏗️ PHASE 1: PRE-ACQUISITION TERMS 

WHISPER PRICE & CALL FOR OFFERS

Before a property ever hits the public market, brokers share something called a Whisper Price—an unofficial number hinting at what the seller expects.

Think of it like insider intel. The best deals are gone before they’re even listed because the pros know that whisper first.

A whisper price is usually 5–10 percent below the seller’s target. But during hot markets, we’ve seen properties start at $35 million and sell for $42 million—just from buyer frenzy.

Today, it’s flipped. Many whisper prices are actually below what sellers paid in 2022—which means opportunity if you know how to read the market cycle.

Then comes the Call for Offers (CFO)—when brokers invite bids. Here’s the pro-move question to ask:

‘What’s the CFO date?’

That one question tells a broker you’re serious.

👉 Rookies ask, ‘How much is it?’ Pros ask, ‘When’s the CFO date?’ Same five seconds—totally different credibility.

LOI (LETTER OF INTENT)

Next is your LOI—Letter of Intent.

This short document outlines your price, terms, and timeline—but it also signals your professionalism.

A strong LOI does three things:

1️⃣ Shows you understand the property,
2️⃣ Proves you can close, and
3️⃣ Makes you the kind of buyer a seller actually wants to work with.

We’ve won deals $50 thousand below the top offer because our LOI told the seller we understood their property better and could close smoothly.

Remember—an LOI isn’t legally binding, but treat it seriously. It’s your handshake before the contract.

PSA (PURCHASE & SALE AGREEMENT)

Once your LOI is accepted, it turns into a PSA—the Purchase and Sale Agreement.

This is where words become legally binding.

The PSA covers everything—inspection timelines, financing, deposits, and what happens if the deal falls apart.

Negotiate it carefully. Redlines kill more deals than bad numbers.

We’ve had PSAs take 45 days of back-and-forth between attorneys—and one we closed in six days flat.

The faster everyone communicates, the smoother your path to closing.

Once the ink’s dry on your PSA, the clock starts ticking. Now you’re officially under contract—and this is where the real due diligence begins.

🏢 PHASE 2: UNDER CONTRACT TERMS

DUE DILIGENCE

Due diligence is where you confirm that what you think you’re buying… is actually what you’re buying.

It’s your chance to inspect the physical property, the leases, and the financials before you close.

First up—Earnest Money. This is your deposit, typically 1–2% of the purchase price. In hot markets, it’s often non-refundable. So if you walk away later, you could lose hundreds of thousands.

But in today’s market, you can sometimes negotiate it as refundable—giving you room to walk if the numbers don’t check out.”

THREE TYPES OF DUE DILIGENCE

There are three types you’ll face on every deal:

🏘 Rent Roll Due Diligence: Verify who’s living there, that leases match occupants, and the income numbers are real.
🔍 Physical Due Diligence: Inspect every roof, HVAC, foundation, and unit. A professional team usually completes this in 1–2 days.
💰 Financial Due Diligence: Review income, expenses, vendor contracts, and tax statements. If the math doesn’t hold, walk away or renegotiate.”

“We’ve passed on deals where the rent roll looked perfect—but one hidden line item in expenses killed the entire return.”

NOI & CAP RATE

Now, let’s decode the two numbers that define value in commercial real estate: NOI and Cap Rate.

NOI—Net Operating Income—is total revenue minus operating expenses. No mortgage included.

Example: $240,000 in income minus $85,000 in expenses equals $155,000 NOI.

Cap Rate = NOI ÷ Purchase Price.

A property with $155K NOI and a $2M price has a 7.75% cap rate.

High cap rates usually mean higher risk. Low cap rates often mean premium markets. The trick is knowing what’s normal for your submarket.

If the market trades at 7% and you find a property at 8.5%, that could be a hidden gem—or a problem waiting to happen. That’s where experience comes in.

DSCR (DEBT SERVICE COVERAGE RATIO)

Next: the number your lender cares about most—DSCR.

It tells them if your property generates enough income to pay the mortgage.

DSCR = NOI ÷ Annual Debt Service.

If your property earns $155,000 NOI and debt service is $125,000, your DSCR is 1.24.

That means for every $1 owed to the bank, you earn $1.24.

Here’s the rule of thumb:

• 1.20 = minimum to qualify
• 1.25 = good
• 1.40+ = great terms and lower rates.”

CASH-ON-CASH RETURN

Finally, the term that shows how fast your money is working for you—Cash-on-Cash Return.

It’s annual cash flow divided by total cash invested.

Example: $18,000 annual cash flow on $100,000 invested = 18% return.

That means you’d earn back your capital in 5.6 years instead of 12.5.

That’s the difference between building wealth slowly… and accelerating it fast.

💼 PHASE 3: OWNERSHIP TERMS

INVESTOR RELATIONS & COMPLIANCE

Once you own the property, your focus shifts from acquisition to stewardship—protecting investor capital and running a compliant operation.

If you syndicate deals, you’ll use investor Subscription Documents—legal agreements outlining risk, distributions, and fees.

Compliance isn’t optional. Whether it’s a 506(b) or 506(c) offering, the SEC requires proper filings, investor verification, and annual reporting.

We budget $25,000–$50,000 per deal for legal compliance. It’s non-negotiable.

Because the truth is—when you’re managing other people’s money, your reputation is your currency.

OPERATIONS & REPORTING

Here’s where real wealth is made: operations.

Monthly profit-and-loss reports should show income, expenses, and NOI—so you can spot issues before they snowball.

We track two reports religiously:

Trending Reports (performance over time) and Variance Reports (budget vs. actual).

A 5% rise in vacancy can erase months of profit if you don’t catch it early.”

CAPEX & RESERVES

Then there’s CapEx—your capital expenditures. These are major repairs and upgrades that preserve or increase value.

Class A properties might need $200–$300 per unit in annual reserves.

Class C? Closer to $600–$800.

Underfund it—and you’ll eat those costs later when the roof leaks or HVAC fails.

💰 PHASE 4: EXIT STRATEGY TERMS

Finally—the exit. When it’s time to sell, the language shifts again.

You’ll focus on valuation drivers:

• Cap Rate Compression: Lower cap rate = higher value.
• Price Per Unit: Compare to recent sales.
• Replacement Cost: Justify your price based on rebuild value.

We’ve sold properties where one buyer valued based on income, another based on replacement cost—and that difference added millions to our final sale.”

🚀 CONCLUSION & CALL TO ACTION

You now speak the language of commercial real estate—whisper price, LOI, PSA, NOI, cap rate, DSCR, and cash-on-cash.

But here’s the truth: knowing these words is just the starting line.

The real power is knowing how—and when—to use them.

Our $400 million portfolio didn’t happen by luck. It came from mastering each phase, understanding every term, and using them as leverage to create wealth.

So here’s your action plan:

1️⃣ Pick one property in your area and calculate its NOI, Cap Rate, DSCR, and Cash-on-Cash Return.
2️⃣ Call a broker and ask, ‘What’s the whisper price?’
3️⃣ Download or review a sample PSA—study it until it feels familiar.

Remember—wealth doesn’t go to those who wait. It goes to those who understand the game and speak the language of money.

Your first commercial deal is waiting for you… and now, you have the words to make it happen.

And if you’ve ever wondered how we’d rebuild from scratch—see you in the next episode.