Below is a Real Estate Glossary that defines the key terms that investors should Know.
Anticipated Hold Period – This is the period of time that an investor anticipates holding each home before looking to liquidate the property. Financing terms are often matched to this hold period to optimize returns.
Accredited Investor – A type of investor that is allowed to invest in riskier investments. The most common qualifications are having a $1M net worth or earning an income of $200,000 for 2 years in a row ($300,000 if married).
Appreciation – A measure of the estimated increase in value of an asset over a time period.
Cap Rate – The cap rate is the NOI divided by the purchase price. The cap rate is an indicator of the risk and return of a property. It tells you the return of an investment before financing costs.
Cash On Cash Return – The cash return on an investment compared to the amount of cash invested. For example, an investment with cash distributions of $50 on a $1,000 investment has a 5% cash on cash return.
Diversification – The process of investing in different investments to reduce a portfolios overall risk.
Dividend Yield – A ratio of annual target cash distributions per share divided by the price per share. Alternatively it is a ratio of the total cash distributions divided by the property purchase price.
Financing – The percentage of the property Purchase Price that will be funded through long-term bank financing.
Inflation – Inflation is simply the rate at which the price of goods and services rises over a period of time. As inflation increases, if your money is in cash or an asset that doesnt increase with the inflation rate, your purchasing power decreases. Real estate investments are a great way to protect against inflation, you can learn more here.
Leverage – Leverage is using a loan to invest into real estate. It has the effect of amplifying returns or losses.
Management Fee – The Management Fee is an operating expense paid to the operator to cover costs of managing the property operations, like annual accounting, audit, and tax filings.
Net Cash Flow – This is the Target Cash Flow that will be available to distribute to investors through dividend payments. Net Cash Flow = Rent Payments — Operating Expenses.
NOI – Net Operating Income (NOI) is the gross profit of a rental property. It’s calculated as gross rents – all expenses other than interest.
Portfolio – A variety of investments and assets.
Systematic Risk – The risk of an individual investment. This risk can be reduced through proper diversification.
Pass-Though Taxation – The process in which a company that does not pay a corporate income tax passes all of its earnings to its owners. The owners then pay taxes on the company income. This is also called single taxation.
Operating Expenses – Operating Expenses include all of the anticipated costs for operating the rental property. Some expenses include Insurance, Property Tax, Vacancy, Maintenance, and Property Management.
Pro-forma – A pro-forma is the estimated financials for an investment. Pro-formas combine known revenue and expenses with estimates to create reasonable financial projections.
Projected Annual Appreciation – This is a projection of the potential increase in value for the property typically based on 3rd party valuation tools.
REIT – A Real Estate Investment Trust (REIT) is a type of company that is designed to invest in real estate. REITs get special tax advantages as long as they adhere to strict requirements.
Series LLC – The series LLC refers to the specific offering that is being put up for sale and that owns the property. Each property is purchased and placed in a LLC for liability and tax purposes.
Single-Family – A type of rental property that is designed for just 1 family to live in. This can be a typical house or townhouse. Duplexes and apartment buildings are considered to be “multi-family” housing because the property can house multiple families.
Total Return – An annualized return for equity investments that includes cash distributions, appreciation, financing percent, and overall expenses.
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