You are working your way into real estate investing. Suddenly you are realizing that just like many other things, when you learn something new you also have to learn the lingo that goes along with it. There are many terms that real estate investors use. It is important that you are up to speed on real estate investing terminology so you aren’t left scratching your head.
Principal, Interest, Property Taxes and Insurance
Also known as PITI, this is essentially the minimum that real estate investors need to keep in mind when considering purchasing property with a loan.
Net Cash Flow
Net cash flow is used to consider the principal on a loan as well as payments. This is the net income that is generated on a monthly basis from a rental property. Positive net cash flow is important when taking out a loan.
Total Cash Return Rate
Total cash return rate is figured by adding the total net cash flow with principal payment and dividing by the total cost that is due at signing. This doesn’t typically include closing costs.
Capitalization (CAP) rates determine the possible return of an investment. If you have a higher percentage, you return rate will be larger. IT is calculated by the gross yearly income divided by the cost of property.
Effective Capitalization Rate
Also known as the “true” CAP rate, this rate is often used to determine the actual capitalization rate, especially if the CAP rate (above) looks to be too good to be true. The effective CAP rate examines the entire picture by using more calculations to determine the net rental income.
Effective CAP rate is determined by net yearly operating income divided by cost of property.
Conditions, Covenants and Restrictions
CCR are referred to as the detail within contracts where parties agree on certain actions, whether they will be performed or not performed. They can be written into a deed or in a rental agreement.
Debt Coverage Ratio
Debt coverage ratio (or DCR) is generally used by lenders during the underwriting process for properties that generate income. It is calculated by taking the NOI and dividing it by the total debt. An ideal ratio os 1.20 and above.
LTV is necessary if you are taking out a loan. It is calculated by dividing a loan by the value of the property. This is then translated into a percentage.
Gross Operating Income
GOI is another common part of real estate investing terminology. This is the actual yearly income generated by a property, including all sources of income. Vacancies are also taken into account.
Net Operating Income
NOI is what is left over after your monthly operating expenses are paid. To determine this, you subtract expenses from your GOI.