Abbreviations & Acronyms

Abbreviations Every New Real Estate Investor Should Know

When reading, conversing, using social media or listening to podcasts about Real Estate Investing, you will invariably hear an alphabet soup of industry abbreviations. The following are some of the more common and important ones. Please reach to me at joe@joecashflow.com if I need to add more!

ARV

After-repair value (ARV) is the estimated value of a property after completed renovations and not its current condition. Investors and house flippers commonly use ARV as a way to gauge the value of a fixer-upper type property, including how much it can be purchased for, and then resold for after the reno (renovations).

CapEx

Capital expenditures (CapEx) are monies used by real estate investors to invest, purchase, renovate, and maintain physical assets such as rental property. For example, replacing the windows, flooring, electrical systems, plumbing, air conditioning would all typically be considered CapEx, as these building elements may need to be replaced someday, but not for a significant period of time.

Funds that are used to upgrade the property to make it more valuable also count under CapEx. This could include adding new equipment to an industrial facility to make it more attractive to potential tenants or to induce current tenants to extend their lease. Add an answer to this item.

Why does it matter?

One of the biggest mistakes made by newer real estate investors is failing to incorporate capital expenditure costs into their rent pricing. Investors are often tempted to charge rent prices significantly lower than their competitors in order to quickly fill vacancies. However, they are often shortchanging themselves, as they may not be able to afford to make significant repairs in the event of a major, unexpected system failure unexpected repairs (i.e., a leaking roof or a failed AC system).

Cap Rate

Capitalization rate (Cap Rate) is a primary metric used by investors to forecast the return on investment (ROI) from a property. Basically, understanding the Cap Rate helps us determine if the property we are considering is s dud or a stud!

Cap rates are calculated by dividing the net operating income (NOI) produced by your property and the original capital cost or its current value.

Let's say you're considering purchasing a rental property for $180,000 that you can rent for $2,000 per month/$24,000 per year. You anticipate annual upkeep expenses of $2,400. This gives you a net operating income (NOI) of $21,600 ($24,000 - $2,400).

To get the cap rate, simply divide the NOI ($21,600) by the property's current fair market value ($180,000). 21,600/180000 = 12%. This means you can expect a 12% annual gross income, or $15,000, on the value of your investment.

So, what is considered a good cap rate?

Basically, the higher the cap rate the better and, in general, a property with an 8% to 12% cap rate is considered good. However, while cap rates can provide valuable insight into a property. it should not be the only metric you consider when evaluating properties. Many other factors, including the property’s individual characteristics and location, should also be taken into consideration.

CoC

Cash-on-cash return (CoC)is a rate of return often used by real estate investors that calculates the cash income earned on the cash invested in a property. Put simply, CoC is an annual measure of a real estate investor’s earnings on a property compared to the amount the investor initially spent to purchase it and make it operational.

Calculating your CoC is simply dividing your annual cash flow by your total cash investment.

Let's say you purchase a rental property for $180,000 and put 20% down ($36,000). You can rent it out for $2,000 per month, your mortgage payment is $1,300 and your monthly upkeep costs are $200. This means your pretax cash flow (the money you take in from the property after debt service) is $6,000: ($2,000 - $1,300 - $200) x 12, and your CoC is 6,000/36,000, or 17%. Expressed as a percentage, it’s an easy way of measuring profitability and extremely helpful in making quick comparisons when assessing potential properties for investment.

So, what is considered a good cash-on-cash return (CoC)?

There really is no specific rule of thumb. It all depends on the investor, the local market, and the potential rate of appreciation, etc. However, most investors are happy with a safe, predictable return of 7%-12%, where others won't touch anything under 15%.

DSCR

Debt service coverage ratio (DSCR) is a metric lenders use to measure the borrower’s ability to service or repay the annual debt service based on the amount of net operating income (NOI) the property generates. Basically, whether or not the property is generating enough income to pay the mortgage.

DSCR is calculated by taking the NOI generated by the rental property and dividing it by the amount of debt owed on the property.

Let's say you own a rental property with an annual rental income of $24,000 with a mortgage payment of $1,300 ($15,600 annually). 38,000/15,600 = 2.4; with a DSCR of 2.4, the property is not only covering the debt service, but is also generating positive cash flow.

So, what is considered a good debt service coverage ratio (DSCR)?

Well, a 1.0 would mean the investor is getting the same amount of rent as their monthly mortgage payments. Which makes them uncomfortable as there is no cushion. So, they typically like to see a DSCR above 1.0. While it can vary amongst lenders, typically anything above 1.2 is considered good and anything above 1.5 would be considered great.

DTI

Debt to income ratio (DTI) is a metric used by lenders to determine whether to make a loan on a property. This metric is typically used in combination with other factors such as the borrower's credit score and loan to value (LTV). If the DTI is too high, a lender may consider the loan too risky and could decline it.

DTI is calculated by dividing the total of all of the borrower's monthly debt payments by their gross monthly income

Let's say your total monthly debt payments are $3,000 and your gross monthly income is $8,000. 3,000/8,000 = 37.5%. This equates to a DTI of 37.5%.

So, what is considered a good debt to income ratio (DTI)?

As a rule of thumb, the lower the DTI, the less risk the lender believes they are taking. Most lenders generally prefer a debt-to-income ratio of around 36%. However, differing loan products and lenders will have different DTI limits . For example, conventional bank or credit union loans typically allow a maximum DTI of 45% and, if the borrower has a high credit score and/or a large amount of cash reserves, they may go as high as 50%.

Equity multiple (EM) is an acronym you will primarily see in the commercial real estate (CRE) space and is defined as the total cash distributions received from an investment, divided by the total equity invested. As with similar formulas, EM is a highly leveraged comparison tool as it provides a quick and easy glimpse into the total profit investors can expect to earn on a particular investment.

So, what is considered a good equity multiple (EM)?

An EM less than 1.0x means you are getting back less cash than you invested. An EM greater than 1.0x means you are getting back more cash than you invested. For instance, an equity multiple of 2.0x means that for every $1 invested, an investor could be expected to get back $2. Basically, doubling your money.

Cons

EM is an important and popular metric when analyzing deals because of its ease and simplicity. How much will my initial investment grow? The EM tells you that immediately and cuts out all of the B.S. However, it does have its limitations as it fails to account for the time value of money (TVM). For example, if a real estate property is purchased for $100,000 and sold later for a total return of $300,000, that’s a 3x EM. If you were told you would triple your money in an investment, would you be excited? I think most all of us would be. But what if I told you, it would take 30 years? Tripling an investment over a timeframe spanning three decades is not as desirable and most of us would pass on such a deal.

GRI

Gross rental income (GRI) is simply the total amount of rent, and any related funds, you can expect to get from a property assuming full occupancy and without deducting expenses.

Let's say you're looking at property that rents for $2,000 per month. Your GRI would be $2,000 or $24,000 annually.

Note - Gross income is vastly different from net income as net income is the amount you received after deducting mortgage payments, repairs, maintenance, and other rental-related expenses.

GRM

The gross rent multiplier (GRM) is a screening metric used by investors to compare rental property opportunities in a given market. The GRM functions as the ratio of the property’s market value over its annual gross rental income.

GRM is calculated by dividing the fair market value (FMV) of the property by the gross rental income (GRI). The lower the GRM means the less time it will take to pay off your rental property.

Let's say you're looking at a property with a FMV of $180,000 and a gross rental income of $24,000. The calculation would be 180,000/24,000 = 7.5 GRM. So, in theory, the payoff period for this property occurs in 7.5 years.

So, what is considered a good gross rent multiplier (GRM)?

GRM is very location/market specific. However, most investors like to see a GRM between 4 and 7. That said, depending on the market, a GRM of 7.5 may be more than fine.

IRR

Internal Rate of Return (IRR) is an acronym primarily seen in the commercial real estate (CRE) space and is an metric used by real estate investors to understand the average annual return they have realized or can expect to realize from a property over time. The IRR combines both profit and time into a single metric and is used by investors to evaluate overall profitability.

For real estate investors, a positive IRR assumes they have or will likely earn a return on their investment while a negative IRR implies the property will likely underperform. So, when evaluating one or several properties against one another, the investment with the highest IRR would likely provide a better return. However, like many such metrics, IRR is simply an estimate and is based based on a number of assumptions. So, while it is a valuable tool for assessing an investment’s potential return, investors should never rely on IRR alone.

LOI

A letter of intent (LOI) is an acronym you will primarily see in the commercial real estate space as a document outlining an agreement between two or more parties before the agreement is finalized. Commercial real estate investors will use a LOI when making an offer on a real estate property.

The primary purpose of a LOI is to express your interest to the asset owner and to open a line of communication letting the owner know what you can offer without having to state every detail of the transaction.

While not as common residential real estate, some may use an LOI to define an offer from a real estate investor to a seller/homeowner, it could also be sent from the investor to real estate broker agent/broker.

LTR

LTV

Loan-to-value (LTV) is a ratio lenders use to assess the risk involved with extending a loan to a borrower. The LTV ratio is basically the mortgage amount divided by the appraised value of the property the borrower wants to purchase.

So, what do lenders consider a good loan to value (LTV)?

Most lenders use 80% as the threshold for a good LTV ratio. Anything below this value is even better. Anything above 80% and the costs (interest rate) for the loan may become higher or the borrowers may simply be denied the loan.

NOI

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PITI

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REI

A popular acronym in the real estate community typically used for real estate investment (REI), real estate investing (REI) or real estate investor (REI).

REIT

A real estate investment trust (REIT) is a company that owns, operates, or finances income-producing commercial real estate (CRE), including office and apartment buildings, warehouses, hospitals, shopping centers, hotels, and even commercial forests.

Modeled after mutual funds, REITs pool the capital of numerous investors. This makes it possible for individual investors to invest in a diversified real estate portfolio and earn dividends—without having to buy, manage, or finance the properties themselves.

SFH

A single-family home (SFH) is a standalone home that doesn't share walls or utilities with another property and is located on its own parcel of land - unlike a townhome, condominium, or apartment. You will most often see SFH used in real estate listings as well as by those in the real estate investor (REI) community (i.e., I am investor who focuses primarily on SFH investment properties).

STR

TVM

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Abbreviations Every New Real Estate Investor Should Know

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