Terminology

1. 1. Rental Property

Rental Property refers to a type of property from which the owner receives a monthly payment from the occupants (tenants) for using or occupying the property. Rental properties may be either residential real estate or commercial real estate.

2. Rental Income

Rental income is the money that is periodically paid by the tenant to the landlord for using the landlord’s property. This is also one of the most common real estate investing terms that you will encounter in your investment journey.

3. Cash-on-Cash return (COC)

This figure is the ratio of annual pre-tax cash flow to the total amount of cash invested, expressed as a percentage. Cash-on-cash return measures the yearly return in relation to how much money you put down. It doesn’t take into consideration some of the other benefits of rental property ownership, including appreciation, loan pay-down, depreciation and other tax benefits. Whereas calculations based on standard ROI consider the total return on an investment, cash-on-cash return only measures the return on the actual cash invested. It’s the cash you’ve got left after one year, divided by the cash you’ve invested.

• Equation: Annual pre-tax cash flow / actual cash invested = Cash-on-cash return 

4. Appreciation

Appreciation is an increase in the value of a real estate property over time. The increase in value may be due to several reasons such as inflation, increased demand, or weakening supply.

5. Predictive analytics 

Predictive analytics provide real estate investors with reliable forecasts of the return on investment they can expect from a particular investment property.

6. Net operating Income (NOI)

Net operating income is income that is generated annually from an investment property after deduction of property expenses. Such expenses may include property tax, property management fees, and utilities.

• Equation: Revenue - (all reasonably necessary operating expenses) = NOI

7. Debt-to-income Ratio (DIR)

This is a personal finance measure used to compare the monthly debt payment of an individual to their monthly gross income. Lenders use this metric to measure the ability of an individual to manage monthly debt repayments.

8. Cash flow

Cash flow is the amount of money you can pocket at the end of each month, after all operating expenses (including loan payments) have been paid. If you spend less money than you earn, your cash flow will be positive. If you spend more money than you earn, your cash flow will be negative.

• Equation: Rental income - all operating expenses (including loan payments) = Cash flow

9. Capitalization rate (Cap Rate)

Capitalization rate is the ratio of the net operating income produced by an investment property to its capital cost or current market value. This is one of a few real estate investing terms that refers to the rate of return expected from an investment property. Beginners should make sure to study each one and understand the major differences between them.

• Example: You purchase a property for $100,000. The expected NOI in the first year is $8,000. Plugging into Cap rate equation we get, $8,000/$100,000 = 8% cap rate.
• Equation: NOI/Purchase price = Cap rate 

10. Off-Market Deal

An off-market property is one that has been sold or is in the process of being sold without any public knowledge or advertisement. Off-market properties are not listed on the public MLS for sale.

11. Internal Rate of Return (IRR)

Internal rate of return is the discount rate at which the net present value (NPV) of all cash flows from an investment or project are zero. This metric is used to estimate the profitability of potential investments.

12. Real Estate Broker

A real estate broker is a licensed professional who represents buyers and sellers of real estate and can work independently.

13. Commercial Real Estate (CRE) 

Commercial Real Estate (CRE) is income-producing property that falls into the main categories of land, industrial, retail, office, special use (such as a gas station or government building), and larger multifamily apartment buildings. By contrast, Residential Real Estate includes property such as single-family homes, townhomes, condominiums and co-ops, and smaller multifamily property with two to four units.

14. Gross Rent Multiplier (GRM)

is the ratio of the price of a rental property to its gross rental income before expenses. Another way of thinking about GRM is that the ratio represents how many years it would take for an investment to pay for itself based on the gross rental income received. Everything else being equal, the lower the GRM is the better the investment may be.

15. Gross Rental Income (GRI) 

is the amount of money collected in rent plus any additional income such as application fees, pet fees, parking fees, advance rent, or any expenses paid by the tenant to the landlord that are not required as part of the lease. Security FaceTime paid by the tenant are not considered to be income. Instead, refundable deposits are treated as a short-term liability on the balance sheet for the rental property because the deposit will eventually be returned to the tenant.

16. Federal Housing Administration (FHA) 

is a government agency that insures FHA mortgage loans. FHA loans are popular with first time home buyers because they allow for low down payments of 3.5% and low credit scores of around 580, or even lower credit score if a slightly higher down payment is made. 

17. Loan-to-Value (LTV) 

Is a percentage that measures the total debt or leverage on a property compared to the market value. In most cases, real estate investors will use a conservative LTV of no more than 75% to 80%. A property with an LTV greater than 80% can be described as over leveraged, creating the risk of potential negative cash flow due to a larger mortgage payment.

18. Closing costs 

are the fees paid at the end of a real estate transaction. These fees vary depending on where you live, the property you buy, and the type of loan you choose. There are costs associated with inspections, transfer of title, loan origination fees, etc.

19. Escrow 

is when an impartial third party holds on to something of value during a transaction. When you make an offer on a property, you will pay a portion of the down payment ahead of time. This payment will be held by an impartial third party in a separate bank account until the contract has been negotiated and the deal has been closed.

20. Capital gains tax

Capital gain or loss is the difference in the value of a property compared to its purchase price. If there is a gain, it is realized after the asset is sold. A short-term capital gain is one year or less; a long-term gain is more than a year. Both must be claimed on your income taxes, but short-term capital gains have a higher tax rate than long-term capital gains.

21. Gross rental yield

Gross rental yield is the total income generated by a property, divided by the price paid for the property and associated closing costs. This is what you get before deducting operating costs (maintenance, property management, insurance, HOA fees, etc).

• Equation: Monthly rent x 12 / purchase price and associated closing costs = Gross rental yield

22. 1031 exchange

This figure is the ratio of annual pre-tax cash flow to the total amount of cash invested, expressed as a percentage. Cash-on-cash return measures the yearly return in relation to how much money you put down. It doesn’t take into consideration some of the other benefits of rental property ownership, including appreciation, loan pay-down, depreciation and other tax benefits. Whereas calculations based on standard ROI consider the total return on an investment, cash-on-cash return only measures the return on the actual cash invested. It’s the cash you’ve got left after one year, divided by the cash you’ve invested.

23. Syndication

Real estate syndication (or property syndication) is a partnership between several investors. They combine their skills, resources, and capital to purchase and manage a property they otherwise couldn't afford. There are usually two roles in property syndication: syndicator and investor. The syndicator is also known as the sponsor.

23. Debt-Service-Coverage-Ration (DSCR)

The debt-service coverage ratio (DSCR) is a measure of the cash flow available to pay current debt obligations.

• Equation: Net Operating Income / Total Debt Service = DSC

24. Forbearance

Forbearance is when your mortgage servicer or lender allows you to pause or reduce your mortgage payments for a limited time while you build back your finances.

25. Private Placement Memorandum (PPM)

A private placement memorandum (PPM) is a legal document provided to prospective investors when selling shares of a real estate investment.  It is sometimes referred to as an offering memorandum or offering document.  A couple of things that will be in a PPM for a multifamily syndication are:

1. Description of the company operating the apartment deal
2. A business plan
3. Return expectations
4. Structure of how returns are paid
5. Terms of the offering
6. Risks of the investment
7. Disclosures associated with the investment
8. Fees charged by the operating group

26. Subscription Agreement

A Subscription Agreement is a legal document in a securities offering package that contains an investor’s representation and warrantees that they meet the financial qualifications to invest, understand the risks, have read all of the documents, have asked all of their questions and sought appropriate financial advice from their own advisers, and can afford to lose the money. It also contains their contact information, signatures, and how much money they will be investing.

27. Operating Agreement 

Operating Agreement (or Limited Partnership Agreement) in the case of an LP entity is the contractual agreement between the sponsor and the passive investors.  The agreement describes the duties and rights of the parties involved in the transaction, such as investor distributions, bylaws, voting rights, and fees collected by the sponsor.  

28. Business Plan/Investment Summary

The business plan or pitch deck or investment summary is the "marketing" piece that details the investment opportunity and its financial projections.  This document may be accompanied by other related documents such as the purchase and sale agreement, asset appraisal, and inspection report.