Glossary of investment terms

Appreciation

Appreciation refers to the increase in the value of a property over time. It can be caused by a number of things including inflation, an increase in demand, or a decrease in the supply of properties. Appreciation can also take into account added value as a result of property improvements — upgrading a kitchen, adding a room or a pool, and so on.

Appreciation is usually projected as a percentage of the property's value over the course of a year.

Break-Even Ratio (BER)

BER is a ratio some lenders calculate to gauge the proportion between money going out and money coming in, so they can estimate how vulnerable a property is to defaulting on its debt if rental income declines. BER reveals the percentage of income consumed by estimated expenses.

Bridge Loan

A bridge loan is a short-term loan used until a person or company secures permanent financing or removes an existing obligation. This type of financing allows the borrower to meet current obligations by providing immediate cash flow. Bridge loans are short term — typically up to one year — carry relatively higher interest rates, and are usually backed by collateral such as real estate.

Cap Rate

This popular return expresses the ratio between a rental property's value and its net operating income. The cap rate formula serves two useful purposes: calculating a property's cap rate, or — by transposing the formula — calculating a reasonable estimate of a property's value.

Cash on Cash Return (CoC)

CoC is the ratio between a property's cash flow in a given year and the amount of initial capital invested to make the acquisition (for example, mortgage down payment and closing costs). Most investors look at cash-on-cash as it relates to cash flow before taxes during the first year of ownership.

Cash Flow Before Tax (CFBT)

CFBT is the number of dollars a property generates in a given year after all expenses, but still subject to the investor's income tax liability.

Cash Flow Property

A cash flow property is an investment property that generates a surplus of money each month after all expenses have been paid. Cash flow properties are highly sought after by investors.

Debt Coverage Ratio (DCR / DSCR)

DCR is a ratio that expresses the number of times annual net operating income exceeds debt service (total loan payment, including both principal and interest).

Results: less than 1.0 — not enough NOI to cover the debt. Exactly 1.0 — just enough NOI to cover the debt. Greater than 1.0 — more than enough NOI to cover the debt.

Gross Operating Income (GOI)

GOI is gross scheduled income less vacancy and credit loss, plus income derived from other sources such as coin-operated laundry facilities. Consider GOI the amount of rental income the investor actually collects to service the rental property.

Gross Rent Multiplier (GRM)

GRM is a simple method used to determine a rental property's market value based on its gross scheduled income. First calculate the GRM using the market value at which comparable properties sold, then apply that GRM to determine the market value of your own property.

Gross Scheduled Income (GSI)

GSI is the annual rental income a property would generate if 100% of all space were rented and all rents collected. If vacant units exist at the time of your analysis, include them at their reasonable market rent.

Leveraged Return

A leveraged return is the return calculated on an investment that takes advantage of a mortgage. It is calculated by subtracting the expenses incurred by the property (including the interest payment on the mortgage) from the income produced by the property, then dividing by the initial investment amount.

This differs from cash-on-cash return because it includes principal pay-down as part of the return. While slightly riskier, leverage lets investors earn higher returns and diversify across multiple properties. For example, an investor could purchase one property for $100,000 — or four $100,000 properties by putting $25,000 down on each.

Loan to Value (LTV)

LTV measures what percentage of a property's appraised value or selling price (whichever is less) is attributable to financing. A higher LTV benefits investors with greater leverage, whereas lenders regard a higher LTV as greater financial risk.

Net Operating Income (NOI)

NOI is a property's income after being reduced by vacancy and credit loss and all operating expenses. NOI is one of the most important calculations in real estate investment because it represents the income stream that determines the property's market value — the price an investor is willing to pay for that income stream.

Operating Expenses

Operating expenses are the costs associated with keeping a property operational and in service — property taxes, insurance, utilities and routine maintenance. They do not include mortgage payments, capital expenditures or income taxes.

Operating Expense Ratio (OER)

OER expresses the ratio, as a percentage, between a real estate investment's total operating expenses and its gross operating income.

Single Family Rentals (SFRs)

A single family rental is a free-standing residential property designed to house one family that was purchased by an investor and rented to a tenant. SFRs are defined in opposition to multi-family property, though properties up to a fourplex are sometimes classified as SFRs as well. Properties with more than four units are defined as multi-family.

Single family properties generally appeal to families, so from an investment perspective they can be seen as more stable — families tend to stay in one place longer, especially when they have children.

Turn Key Property (TKP)

A turnkey property is a property that has been purchased, rehabbed and rented to a tenant, and is now for sale to another investor. Turnkey properties usually cash flow from the moment the investor purchases them, since the property is already rented.

Vacancy Provision

The money investors set aside to prepare for future vacancy is called a vacancy provision. It is a percentage of the monthly rent. A common provision is 6% for vacancy and 6% for maintenance.