Real Estate Investment Terms - Flashcard set - Mathematical Finance

Still learning

Loan-to-Value Ratio (LTV)

The loan-to-value ratio is a lending risk assessment ratio that financial institutions examine before approving a mortgage. Formula:

\text{LTV} = \frac{\text{Loan Amount}}{\text{Appraised Property Value}}

Cap Rate

The capitalization rate is the rate of return on a real estate investment property. Formula:

\text{Cap Rate} = \frac{\text{Net Operating Income}}{\text{Current Market Value}}

Return on Investment (ROI)

Return on investment measures the amount of return on an investment relative to the investment's cost. Formula:

\text{ROI} = \frac{\text{Net Return on Investment}}{\text{Cost of Investment}} \times 100\%

Leverage

Leverage in real estate refers to the use of borrowed capital to increase the potential return of an investment. Formula:

\text{Leverage} = \frac{\text{Total Investment}}{\text{Equity Invested}}

Cash Flow

Cash flow is the net amount of cash and cash equivalents being transferred into and out of a business. In real estate, it is the profit from a property after operating expenses and mortgage payments. Formula:

\text{Cash Flow} = \text{NOI} - \text{Debt Service}

Operating Expense Ratio (OER)

The operating expense ratio is the comparison of a property's operating expense to its gross operating income. Formula:

\text{OER} = \frac{\text{Operating Expenses}}{\text{Gross Operating Income}}

Capital Expenditures (CapEx)

Capital Expenditures refer to funds used by a company to acquire, upgrade, and maintain physical assets such as property, buildings, or equipment. Formula: No set formula, CapEx includes costs for building improvements, roofing, HVAC, etc.

Occupancy Rate

The occupancy rate is the ratio of rented or used space compared to the total amount of available space. Formula:

\text{Occupancy Rate} = \frac{\text{Rented Units}}{\text{Total Available Units}} \times 100\%

Vacancy Rate

The vacancy rate is the percentage of all available units in a rental property that are vacant or unoccupied at a particular time. Formula:

\text{Vacancy Rate} = \left(1 - \frac{\text{Occupied Units}}{\text{Total Units}}\right) \times 100\%

Debt Service Coverage Ratio (DSCR)

The debt service coverage ratio measures the cash flow available to pay current debt obligations. Formula:

\text{DSCR} = \frac{\text{Net Operating Income}}{\text{Total Debt Service}}

Gross Rent Multiplier (GRM)

The gross rent multiplier is used to assess a property's value by comparing its price with its rental income. Formula:

\text{GRM} = \frac{\text{Property Price}}{\text{Gross Rental Income}}

Equity Multiple

The equity multiple is a performance metric that shows how much an investor will get back from an investment in total cash distributions. Formula:

\text{Equity Multiple} = \frac{\text{Total Cash Distributions}}{\text{Total Equity Invested}}

Cash on Cash Return

Cash on cash return measures the annual return the investor made on the property in relation to the amount of mortgage paid during the same year. Formula:

\text{Cash on Cash Return} = \frac{\text{Annual Pre-tax Cash Flow}}{\text{Total Cash Invested}}

Amortization

Amortization is the process of spreading out a loan into a series of fixed payments over time. Formula:

P = \frac{rP_n}{1-(1+r)^{-n}}

where

P

is the periodic payment,

P_n

is the principal amount,

r

is the interest rate per period, and

n

is the number of payments.

Gross Potential Income (GPI)

Gross Potential Income is the maximum income that a property can generate when it's fully occupied and all rents are collected. Formula:

\text{GPI} = \text{Total Number of Units} \times \text{Potential Rent per Unit}

Effective Gross Income (EGI)

Effective Gross Income is the total income generated by a property after subtracting vacancy losses and adding miscellaneous income. Formula:

\text{EGI} = \text{Gross Potential Income} - \text{Vacancy Losses} + \text{Miscellaneous Income}

Net Operating Income (NOI)

Net Operating Income is the total income from property after subtracting operating expenses. Formula:

\text{NOI} = \text{Gross Rental Income} - \text{Operating Expenses}

Rate of Return

The rate of return on an investment is the gain or loss of a security in a particular period divided by the cost of the investment. Formula:

\text{Rate of Return} = \frac{\text{Investment Return}}{\text{Investment Cost}} \times 100\%

Internal Rate of Return (IRR)

The internal rate of return is the interest rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. Formula:

\text{NPV} = \sum\frac{\text{Net Cash Flow}_t}{(1 + \text{IRR})^t} = 0

where

t

is the time period.

Break-Even Ratio (BER)

The break-even ratio indicates the percentage of income that is consumed by the sum of the property's operating expenses and debt service. Formula:

\text{BER} = \frac{\text{Operating Expenses} + \text{Debt Service}}{\text{Gross Operating Income}} \times 100\%

Know

Discover published sets by community