Real Estate Industry Terms Flashcards
Investment Formula:
Net Operating Income (NOI)
NOI = Total Property Revenue – Operating Expenses
Total property revenue includes all of the revenue generated from renting out the property, which mostly comes from monthly rent payments from tenants.
Operating expenses are the costs associated with operating and maintaining the property,
What are some examples of operating expenses?
Property management fees
Property taxes
Insurance
Utilities
Maintenance costs
- Remember there are fixed and variable expenses
Why do investor’s use cap rates?
Capitalization rate or cap rate is a key formula used to evaluate the potential return on an investment property.
Investment Formula:
Cap Rate
(Capitalization Rate)
Cap Rate = (NOI / Current Market Value) x 100
A property’s current market value is the estimated value of the property in the market, which is determined through an appraisal that considers comparable properties, recent sales data, and other factors.
*Remember, A higher cap rate indicates a higher potential return relative to the property’s value but also higher risks associated with that investment
Investment Analysis Software Definition
Focuses on evaluating potential investments to determine their profitability, risk, and alignment with investment goals. It is used for tasks such as portfolio management, stock screening, risk assessment, and real estate or business acquisition analysis.
What is PMS/CRM Software
Property Management Software (PMS) and Client Relationship Management (CRM) software serve distinct purposes but can sometimes overlap in functionality, especially in industries like real estate. Here’s a detailed comparison:
Property Management Software used primarily in what areas of real estate industry? What about CRM (client relationship management) software?
Property Management Software (PMS): Designed to help property managers and landlords manage rental properties, tenants, leases, and maintenance efficiently. CRM software is focused on managing and improving relationships with clients or customers. It’s primarily used for sales, marketing, and customer service.
What does a higher cap rate suggest?
A higher cap rate generally signals a property with greater income potential or lower valuation relative to its income. However, it often accompanies higher risk, less desirable locations, or increased management challenges. Investors should evaluate all contributing factors to ensure alignment with their investment goals and risk tolerance.
What does a lower cap rate suggest?
A lower capitalization (cap) rate in real estate investments typically signals a combination of lower risk, premium location, or stable income. While lower cap rates may initially suggest reduced returns relative to the purchase price, they often indicate strong, long-term investment potential. Here’s what a lower cap rate generally reflects: stable income, prime locations, competitive markets, higher property values.
Where do you normally find low cap rates in relation to the real estate market?
A lower cap rate signals lower risk and higher property value but also lower initial returns on investment. It is often a trade-off: investors accept lower cash-on-cash returns in exchange for stability, asset appreciation, and long-term security. Lower cap rates are most common in premium, high-demand markets with strong economic fundamentals and secure income streams.
What is debt service?
Your total debt service refers to how much you need to pay to meet your debt obligations, including principal and interest payments on loans associated with the property.
Lenders typically have a minimum DSCR requirement that a property must meet to qualify for financing.
For example, a DSCR below 1.0 may indicate that the property is not generating sufficient income to cover its debt obligations.
DSCR Definition
The ratio of a property’s net operating income (NOI) to its total debt service (loan principal and interest payments).
Example: A DSCR of 1.25 means the property generates 25% more NOI than the debt service.
Most lenders require a DSCR of at least 1.20 to 1.50 for approval.
what is Gross rent multiplier (GRM)
GRM = Property Price / Gross Rental Income
Property price reflects the current market value or purchase price of the property.
Gross rental income is the total income generated from renting out the property before deducting any operating expenses.
GRM helps investors compare different properties and identify those with a lower GRM.
What is the primary purpose behind the gross rent multiplier (GRM)?
GRM assesses the relationship between a property’s price and its potential rental income.
By calculating a property’s GRM, investors can determine how many years of gross rental income it would take to cover the cost of the property.
What’s the purpose behind cash on cash return investment formula
Cash-on-cash return (CoC)
CoC return helps investors evaluate the return on their actual cash investment in a property.
CoC return is a valuable risk assessment tool and helps investors compare different opportunities using a standardized measure of return.
A higher CoC return suggests a better return on investment and may be associated with a lower level of financial risk.
