Multi-Family Investing Terms You Should Know

Cap Rate

The capitalization rate is used in the world of commercial real estate to indicate the rate of return that is expected to be generated on a real estate investment property. Often called as the “cap rate,” this measure is computed based on the net income which the property is expected to generate. It is used to estimate the investor’s potential return on their investment in the real estate market.

Net Operating Income – NOI

Net operating income (NOI) is a calculation used to analyze the profitability of real estate investments that generate income. Net operating income equals all revenue from the property minus all reasonably necessary operating expenses.

NOI is a before-tax figure that excludes principal and interest payments on loans, capital expenditures, depreciation, and amortization. The metric is also used in other industries but is called EBIT, or earnings before interest and taxes.

Debt Service Coverage Ratio – DSCR

The cash flow available to pay current debt obligations. The ratio states net operating income as a multiple of debt obligations due within one year.

Example $2000 (Gross Rent) – $700 (Expenses (Excluding Debt Service) = $1300. Assume Principle and Interest is $650. $1300/650 = 2

Syndication

Group of people forming a business entity to conduct business.  Could be structured as debt or equity financing.

Non-Recourse Debt

Non-recourse debt is a type of loan secured by collateral, which is usually property. If the borrower defaults, the issuer can seize the collateral but cannot seek out the borrower for any further compensation, even if the collateral does not cover the full value of the defaulted amount. This is one instance where the borrower does not have personal liability for the loan.

Bad Boy Carve-Out

Protections for the lender in the case of the borrower goes out of their way to conduct themselves poorly. Such as providing fraudulent financial statements.

DUS Lender

Fannie Mae’s Delegated Underwriting and Servicing (DUS) Lenders. These lenders are authorized by Fannie Mae to underwrite, close and deliver most loans without their pre-review, which translates into the most efficient service available in the industry.

Cash On Cash Return

A cash-on-cash return is a rate of return often used in real estate transactions that calculates the cash income earned on the cash invested in a property. Put simply, cash-on-cash return measures the annual return the investor made on the property in relation to the amount of mortgage paid during the same year. It is considered relatively easy to understand and one of the most important real estate ROI calculations

XIRR vs IRR (Internal Rate of Return)

Rate of return on investment. However, that assumes all of the time periods are the same. XIRR gives you the flexibility to assign specific dates to each individual cash flow, making it a much more accurate calculation.

Contract Services

Agreements with service providers such as pest control, laundry facility maintenance or management, lawn care, snow removal.

Loss To Lease

Refers to income on leases that is potentially lost through making incentive offers to prospective tenants whom you hope to lease a unit in a property.

Physical Vacancy

Loss of income due unit actually being unoccupied or not leased.

Gross Potential Rent

Assumes the property is rented every day and the advertised rental rate is collected.

Effective Gross Income

Effective Gross Income, or EGI, can be calculated by taking the Potential Gross Income from an investment property, add other forms of income generated by that property and subtract from it vacancy and collection losses.

Many definitions were taken directly from https://www.investopedia.com/

 

 

 

Cap Rate

Depreciation

Closing Cost

Points

Net Operating Income (NOI)