Real Estate Finance terms Flashcards
What is a pro forma?
A presentation of financial projections, typically of expected future results.
Based on assumptions + actions to be taken
Represents estimate of:
- future income
-cash flow
- selling price
if certain assumptions are achieved
What is an operation pro-froma?
Looks at the anticipated year-to-year results from ongoing operation of the rental property
What does a resale pro forma look at?
Examines the expected one-time gain + cash proceeds from the disposition of the property.
Valuable bc allows you to constantly refresh assumptions to make decisions based on up-to-date and available information
What is equity?
The market value of a real property, minus any debt.
Financial interest that an owner(s) has/have in a piece of real estate
What is mortgage?
A debt, secured by the collateral of specified real estate that the borrower is expected to pay back with a predetermined set of payments.
What is vacancy allowance?
Estimate of amount of potential income that will be LOST due to vacancy
Usually expressed as percentage of PGI (potential gross income)
What is potential gross income (PGI)
Total annual rent value of all units in the property.
Includes actual rent generated by occupied units + potential rent from vacant units
What is effective gross income (EGI)?
PGI - Vacancy allowance + any additional revenue (e.g. laundry, parking etc)
In short= amount you collect
What are operating expenses?
Costs to run + maintain the facility
(General and administrative, insurance, utilities, property taxes etc)
Loan payments, depreciation, capital expenditures NOT examples of operating expenses
What is the management fee?
Cost of hiring a third-party property manager
What are replacement reserves?
A reserve many MORTGAGE LENDERS require to be set aside, held in escrow for capital expenditures.
What is net operating income?
EGI - operating expenses
What is left of your total potential INCOME after all vacancy and expense items have been subtracted
Mortgage payments and capital expenditures have no impact on NOI
3 methods to estimate a project’s valuation:
- Sales comparison
Use comparable properties to estimate value based on qualities
- Don’t want to pay more than what other similar properties have recently sold for
- Cost approach- what does it cost you to build it?
- Income capitalization:
Estimate value based on calculated NOI from stable cash flow
Value = (Annual net operating income)/ Cap rate
Definitions combined
Potential gross income: less vacancy and credit loss
What is credit loss?
Accounts for UNCOLLECTED RENT.
Usually expressed as % of PGI
