1. Cap Rate (Capitalization Rate)
The cap rate is a ratio used to estimate the return on an investment property. It is calculated by dividing the net operating income (NOI) by the current market value or purchase price of the property.
Formula: Cap Rate = NOI / Property Value
Use: Indicates the potential return on investment in relation to the property’s cost. A higher cap rate implies a higher return but also higher risk.
2. Cash-on-Cash Return
A measure of the annual return earned on an investment based on the cash invested. It is calculated by dividing the annual pre-tax cash flow by the total cash investment.
Formula: Cash-on-Cash Return = Annual Cash Flow / Total Cash Invested
Use: Provides investors with an idea of how their cash investment is performing annually.
3. Net Operating Income (NOI)
NOI is the total income from a property after all operating expenses are subtracted, but before deducting taxes and financing costs (such as mortgage payments).
Formula: NOI = Gross Operating Income - Operating Expenses
Use: Used to evaluate the profitability of an income-generating property.
4. Gross Operating Income (GOI)
GOI refers to the total income generated by a property, including rental income and other sources such as parking fees, laundry facilities, and vending machines, before deducting expenses.
Formula: GOI = Gross Rental Income + Other Income
Use: Used to measure the total income potential of a property.
5. Vacancy Rate
The percentage of all available rental units that are unoccupied or vacant at a given time.
Formula: Vacancy Rate = (Vacant Units / Total Units) * 100
Use: Helps assess the supply and demand dynamics in a given real estate market.
6. Internal Rate of Return (IRR)
IRR is the rate at which the net present value (NPV) of all cash flows from an investment equals zero. It represents the average annual return earned over the life of the investment.
Formula: NPV = 0
Use: Helps investors understand the profitability and potential of an investment over time.
7. Debt Service Coverage Ratio (DSCR)
The DSCR measures a property’s ability to cover its debt obligations. It is calculated by dividing NOI by the annual debt service (total mortgage payments).
Formula: DSCR = NOI / Annual Debt Service
Use: Lenders use this to determine if a property generates enough income to cover its mortgage payments.
8. Loan-to-Value Ratio (LTV)
The ratio of a loan amount to the appraised value of the property.
Formula: LTV = Loan Amount / Appraised Property Value
Use: Used by lenders to assess the risk of a loan. A lower LTV ratio generally means a lower risk for the lender.
9. Gross Lease
A type of lease where the tenant pays a fixed rent, and the landlord covers most or all property expenses such as taxes, insurance, and maintenance.
Use: Commonly used for office and retail properties where the tenant prefers predictable costs.
10. Triple Net Lease (NNN)
A lease agreement where the tenant is responsible for paying the base rent, as well as property taxes, insurance, and maintenance expenses.
Use: Common in retail and industrial properties, as it shifts financial responsibility for the property from the landlord to the tenant.
11. Build-to-Suit
A real estate development project where a developer constructs a building to meet the specific needs of a tenant.
Use: Often used by large corporations that want custom-designed facilities without owning the property.
12. Tenant Improvements (TI)
Alterations or improvements made to a rental space to customize it for a tenant’s needs. These costs are often negotiated as part of a lease agreement and may be paid by the landlord, tenant, or both.
Use: Common in office and retail leases to prepare a space for the incoming tenant's specific use.
13. Common Area Maintenance (CAM)
CAM refers to expenses related to maintaining shared spaces in commercial properties, such as hallways, parking lots, and elevators. Tenants usually share these costs.
Use: Typically part of a triple net lease agreement in retail or office buildings.
14. Absorption Rate
The rate at which available properties in a specific real estate market are leased or sold over a given time period.
Formula: Absorption Rate = Total Units Leased or Sold / Total Available Units
Use: Helps gauge the demand for real estate in a particular area.
15. Real Estate Investment Trust (REIT)
A REIT is a company that owns, operates, or finances income-producing real estate across various sectors. REITs allow investors to pool funds and invest in real estate assets without having to own or manage the properties directly.
Use: Provides investors with exposure to the real estate market while offering liquidity through publicly traded shares.
16. Capital Expenditures (CapEx)
Capital expenditures are funds used by a property owner to acquire, upgrade, or maintain physical assets such as the building structure or systems (HVAC, electrical, etc.).
Use: Essential for maintaining or increasing the value of a property over time.
17. Amortization
Amortization refers to the process of gradually paying off a loan over time through regular payments of both principal and interest.
Use: Helps investors understand how much of their loan balance will be paid off over the life of a mortgage.
18. Appreciation
The increase in the value of a property over time due to factors such as market demand, inflation, and improvements to the property.
Use: A key source of profit for real estate investors.
19. Depreciation
Depreciation is a reduction in the value of an asset over time due to wear and tear, aging, or obsolescence. In real estate, this can be used as a tax deduction.
Use: Helps property owners lower their taxable income by accounting for the physical deterioration of their assets.
20. Return on Investment (ROI)
A measure of the profitability of an investment. ROI is calculated by dividing the net profit by the total investment cost.
Formula: ROI = (Net Profit / Total Investment Cost) * 100
Use: Investors use ROI to compare the profitability of different investment opportunities.
21. Pro Forma
A financial statement or projection that estimates the potential financial performance of a property, including income, expenses, and potential returns.
Use: Used by investors and developers to evaluate the potential profitability of a property before purchasing or developing it.
22. Ground Lease
A lease agreement where a tenant leases the land from the property owner and is responsible for building and maintaining improvements (such as buildings) on the land.
Use: Common in commercial real estate where the landowner does not want to sell the property but still wants to generate income from it.
23. Due Diligence
The process of investigating and verifying all aspects of a real estate transaction before finalizing the deal. This includes financial, legal, and physical inspections of the property.
Use: Critical for mitigating risk and ensuring the property is a sound investment.
24. Rent Roll
A document that outlines all the rental income generated by a property, listing tenant names, lease start and end dates, rent amounts, and any other relevant information.
Use: Used by property owners and investors to track rental income and occupancy rates.
25. Sale-Leaseback
A transaction in which a property owner sells the property and then leases it back from the buyer, continuing to occupy and use the space.
Use: Allows businesses to free up capital while retaining control of their real estate assets.
26. Capital Stack
Refers to the various layers of capital invested in a real estate transaction, typically consisting of equity, mezzanine financing, and debt.
Use: Helps investors understand the financial structure and risks associated with
27. Equity
The value of ownership in a property after accounting for debts or liabilities.
Formula: Equity = Property Value - Mortgage or Debt Balance
Use: Represents the portion of the property that the owner actually owns and can build over time as the property appreciates or debt is paid off.
28. Gross Rent Multiplier (GRM)
A quick method for evaluating the value of an income-generating property, calculated by dividing the property's sale price by its gross rental income.
Formula: GRM = Property Price / Gross Rental Income
Use: Used to compare different properties' earning potential.
