GLOSSARY OF INVESTMENT TERMS
Appreciation refers to the increase in the value of a property over time. Appreciation can be caused by a number of things including inflation, the increase in demand or a decrease in the supply of properties. Appreciation can also take into account added value as a result of property improvements (such as upgrading a kitchen, adding a room or a pool, etc.).
Appreciation is usually projected as a percentage of the property’s value over the course of a year.
Appreciation is usually projected as a percentage of the property’s value over the course of a year.
BER is a ratio some lenders calculate to gauge the proportion between the money going out to the money coming so they can estimate how vulnerable a property is to defaulting on its debt if rental income declines. BER reveals the percent of income consumed by the estimated expenses.
(Operating Expense + Debt Service)
÷ Gross Operating Income
= Break-Even Ratio
A bridge loan is a short-term loan used until a person or company secures permanent financing or removes an existing obligation. This type of financing allows the user to meet current obligations by providing immediate cash flow. The loans are short term, up to one year, with relatively high-interest rates and are usually backed by some form of collateral such as real estate or inventory.
(Operating Expense + Debt Service)
÷ Gross Operating Income
= Break-Even Ratio
OR
(Operating Expense + Debt Service)
÷ Gross Operating Income
= Break-Even Ratio
CoC is the ratio between a property’s cash flow in a given year and the amount of initial capital investment required to make the acquisition (e.g., mortgage down payment and closing costs). Most investors usually look at cash-on-cash as it relates to cash flow before taxes during the first year of ownership.
(Operating Expense + Debt Service)
÷ Gross Operating Income
= Break-Even Ratio
CFBT is the number of dollars a property generates in a given year after all expenses but in turn still subject to the real estate investor’s income tax liability.
Net Operating Income
less Debt Service
less Capital Expenditures
= Cash Flow Before Tax
A cash flow property is an investment property that generates a surplus of money each month after all expenses have been paid. Cash flow properties are highly sought after by investors.
DCR is a ratio that expresses the number of times annual net operating income exceeds debt service (i.e., total loan payment, including both principal and interest).
Net Operating Income
÷ Debt Service
= Debt Coverage Ratio
DCR results:
GOI is gross scheduled income less vacancy and credit loss plus income derived from other sources such as coin-operated laundry facilities. Consider GOI as the amount of rental income the real estate investor actually collects to service the rental property.
Net Operating Income
Gross Scheduled Income
less Vacancy and Credit Loss
plus Other Income
= Gross Operating Income
GRM is a simple method used by analysts to determine a rental income property’s market value based upon its gross scheduled income. You would first calculate the GRM using the market value at which other properties sold, and then apply that GRM to determine the market value for your own property.
Market Value
÷ Gross Scheduled Income
= Gross Rent Multiplier
Then,
GSI is the annual rental income a property would generate if 100% of all space were rented and all rents collected. If vacant units do exist at the time of your real estate analysis then include them at their reasonable market rent.
Rental Income (actual)
plus Vacant Units (at market rent)
= Gross Scheduled Income
A leveraged return is the return calculated on an investment that takes advantage of a mortgage. It is calculated by subtracting the expenses incurred by the property (including the interest payment on the mortgage) from the income produced by the property and dividing that by the initial investment amount.
Calculation: Income – expenses (including interest payment) / initial investment amount
This differs from the cash on cash return because it includes the principal pay down as part of the return.
LTV measures what percentage of a property’s appraised value or selling price (whichever is less) is attributable to financing. A higher LTV benefits real estate investors with greater leverage, whereas lenders regard a higher LTV as a greater financial risk.
Loan Amount
÷ Lesser of Appraised Value or Selling Price
= Loan to Value
NOI is a property’s income after being reduced by vacancy and credit loss and all operating expenses. NOI is one of the most important calculations to any real estate investment because it represents the income stream that subsequently determines the property’s market value – that is, the price a real estate investor is willing to pay for that income stream.
Gross Operating Income
less Operating Expenses
= Net Operating Income
Operating expenses include those costs associated with keeping a property operational and in service. These include property taxes, insurance, utilities, and routine maintenance. They do not include payments made for mortgages, capital expenditures or income taxes.
Operating Expense Ration (OER)
OER expresses the ratio (as a percentage) between a real estate investment’s total operating expenses dollar amount to its gross operating income dollar amount.
Operating Expenses
÷ Gross Operating Income
= Operating Expense Ratio
S
Single Family Rentals (SFRs)
A single family rental, or SFR is a free-standing residential property designed to house one family that was purchased by an investor and rented to a tenant. SFRs are defined in opposition to a multi-family property, though properties up to a fourplex are sometimes classified as SFRs as well. Properties with more than four units are defined as multi-family properties. Single family properties generally appeal to families, so from an investment perspective, can be seen as more stable. Families tend to want to stay in one place for longer, especially when they have children. HomeUnion offers fully managed SFRs investments across a wide variety of markets in the US.
A turnkey property, or TKP is a property that has been purchased, rehabbed and rented to a tenant and is now for sale to another investor. Turnkey properties usually cash flow from the moment the investor purchases it since the property is already rented.
The money that investors set aside to prepare for future vacancy is called a vacancy provision. It is a percentage of the monthly rent. The average vacancy provision is 6% for vacancy and 6% for maintenance.
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