REAL ESTATE TERMINOLOGIES YOU NEED TO LEARN TO INVEST

ACCREDITED INVESTOR

Accredited investors earn annual earnings of $300,000 or $200,000 when married couples file jointly or are worth a minimum of $1,000,000, excluding the primary residence. Many of the real estate syndication services are available only to accredited investors.

SOPHISTICATED INVESTOR

The term “sophisticated investor” refers to investors with the right financial and business knowledge to assess the benefits and risks associated with sophisticated investment options. Unlike accredited Investors, there’s no particular net worth or income requirement.

NOI – NET OPERATING INCOME

Net Operating Income (NOI) is all the profits from the property, less the operating costs. In addition to renting, the property could also generate income from parking or service charges like laundry, house cleaning, pet rent, and many more. Operating expenses are the cost of operating and maintaining the grounds and the building, including insurance, property management charges, legal fees, and property taxes, as well as utilities repair and janitorial costs. NOI is used to evaluate the worth of the property by anticipating the cash flow of the property.

CAP RATE

Capitalization rates are utilized all over the world in commercial real estate to show the return rate which is expected to be earned from the investment property of the real estate. Sometimes, it is referred to as “cap rate” or “cap rate,” this measure is calculated based on the net income it is anticipated to earn. It’s used to determine the potential return for investors on their investment in the market for real estate. A higher cap rate means a higher return, as it is currently operating.

SPONSOR

In commercial real estate, the sponsor is the person or business responsible for finding, purchasing, and managing the property for the partnership. They are then responsible for obtaining the rest of the funds and acquiring and managing the day-to-day operations of the investment property. If you are a Limited Liability business (LLC) (also known as limited partnerships), the company’s sponsor generally is an administrator or the main partner. The sponsor is responsible for distributing the payments, reports, and tax documentation to the investors themselves.

GENERAL PARTNER

The term “general partner” refers to a partnership’s owner and has no liability limit. They typically are the managing partners and participate in the daily business activities. General partners are accountable for the legal obligations of the partnership.

LIMITED PARTNER

The term “limited partner” refers to a company partner whose liability is limited to the value of their investment in the business. They are also referred to as silent partners. Their income is classified as passive income by the IRS. In a typical real-estate syndicate, a limited partner is a passive investor that invests capital.

OVERSUBSCRIPTION

A commercial real estate offer will be “oversubscribed” when the raised investor funds exceed the amount of equity the promoter was seeking to raise. It means that there is more demand than available and the chance to invest is on a waiting list.

PREFERRED RETURN

The name suggests that preferred return refers to a profit distribution preference, where profits, whether from sales, operations or refinance, are distributed to a particular class of equity before the other until a specific rate of return on investment is achieved. The rate of return is specified in terms of percentages, for example, A return of 6% on investment initial; however, it is also defined as a specific equity multiple. This is a comfort for investors as it entitles them to any compensation until the deal has reached an amount of return.

ANNUALIZED RETURN

The annual return represents the profit on investment made over a year and is determined in percentages of the initial investment amount.

INTERNAL RATE OF RETURN (IRR)

The internal rate of return is a measurement of an investment’s anticipated rate of return in the future. The internal rate of returns (IRR) measures the project’s expected percentage return. It takes the project’s cost at the beginning of the project and estimates the expected cash flows to determine an interest rate. The higher a project’s yield, the more attractive it is to pursue the project.

EQUITY MULTIPLE

The equity multiple refers to the cash distributions an investment earns multiplied by the equity investment total. The higher the equity multiplier is, the more attractive the returns on investment are.

APARTMENT SYNDICATION

Apartment syndication refers to the collection of money from a variety of investors. The money can be used to purchase an apartment building and then implement the project’s business plan. Apartment syndications are the simplest form of real estate partnerships that combine capital and passive investors with a sponsor who arranges the deal and oversees it.

VALUE-ADD

Investments in real estate with value usually focus on properties with in-place cash flow but aim to increase the cash flow through time by making improvements or shifting the property. This can be achieved by increasing the income or reducing the costs, which add to the property’s NoI (Net Operating Income). This raises the cap value of the asset and eventually increases the asset’s value overall.

MARKET VALUE

Market value is the amount an asset could be sold on the market. For commercial properties, the market value could be affected by the area where the house is located (major market or rural), the demand for the type of asset (Class B versus Class), the installed amenities, and many other factors.

SELF-DIRECTED IRA -SIDRA

Self-directed IRA (SDIRA) refers to where the investor is responsible for making their own investment decisions, and traditional brokerage companies don’t typically provide them. They offer investors more opportunities to diversify their investments beyond traditional bonds, stocks, or mutual funds. Self-directed IRAs differ from Roth and traditional IRAs as they can invest in real property, private market securities, and many more.

LTV

The ratio of Loan-to-Value (LTV) calculates by dividing the loan amount by the appraised value of the property. Typically, assets with large LTV ratios are at greater risk because the sponsor will be accountable for the loan service, regardless of whether the investment meets or isn’t performing to its goals.

CAPITAL IMPROVEMENT

A capital improvement is an improvement that improves an asset’s value. It extends its life span or adapts it for new purposes. Alongside making the property more desirable, the capital improvement also improves the property Improvement also raises the value of the asset

DEBT SERVICE COVERAGE RATIO – DSCR

The DSCR is the ratio commercial mortgage lenders employ to assess and determine if a deal is eligible to finance. The DSCR measures the amount of cash flow that will be available to pay for the debt service. A DSCR number of one indicates the cash flow will be sufficient to cover debt repayments. Most lenders will require an initial DSCR of 1.2 to obtain the loan. A higher ratio could be a good way to qualify for better conditions.

LEVERAGE

Leverage involves the utilization of different financial instruments or borrowed capital to buy and enhance the potential return of an investment.

KEY PRINCIPLE

A fundamental principle is typically the Guarantor of the loan in the Multifamily Syndication. They have considered it crucial to the ongoing management and achievement of the investments.

BREAKEVEN OCCUPANCY

The level at which the net income is the total of operating expenses and debt service. Breakeven occupancy is an essential measurement for lenders, developers, and owners since it’s the level where the property goes from an operating deficit to an operational surplus.

GROSS RENT MULTIPLIER

The Gross Rent Multiplier (GRM) represents the percentage of the value of an investment in real estate and the annual rental income it earns without accounting for costs like property taxes, insurance, and utilities. GRM is the amount of time the property will take to cover its costs in rent received gross.

GROSS POTENTIAL INCOME

Gross Potential Income (GPI) is the total rental income that property could generate when all units are rented and leased at market prices, rents that have a zero-vacancy rate. Gross potential income could also be called potential gross income as well as gross scheduled income or gross rent.

LOAN-TO-COST – LTC

The LTC ratio displays the amount of the loan amount anticipated concerning the total costs (acquisition or renovations).

RENT ROLL

Rent registers include details of the tenants’ names, their rents due, and the total revenue for the home.

UNDERWRITING

The process through which real property investments are assessed to evaluate their viability and their potential.

PRO-FORMA

A set of calculations project the potential financial returns that a real estate development is expected to generate. It is possible to think of pro forma as an estimate of financials.

CASH-ON-CASH RETURN

Cash-on-cash returns calculate the cash earnings earned from the capital invested in the property. It’s often called the cash yield. Cash-on-cash calculates the return on the cash that was invested. The traditional ROI includes the full return on investment.

PROFIT AND LOSS STATEMENT

A financial statement outlines the business’s performance and the elements of net income, including the sale of real estate, rental income, operating expenses, rental operations, and income before tax.

HOLD PERIOD

When it comes to commercial real estate, the hold period refers to the time when the investment is completed and when the property is sold. Because property investments are not liquid, investors cannot sell their investment before the end of the time period of holding, unlike public stocks, which can be traded at any point. Most sponsors aim for a hold for 3-5 years; however, some investments are at least 10 years.

Disclaimer: This article is for educational purposes only and should not be construed as financial or investment advice

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