Real Estate Terms and Definitions |

vulnerable a property is to defaulting on its debt if rental income were to decline.

of initial investment (plus any additional capital expenditures not financed). Expressed

as a percentage. Can be looked at on a Before- and After-Tax basis. This

calculation does not take in account any time value of money, so is mostly used for to

measure cashflow in the first year.

Price or Value. Expressed as a percentage.

This is one of the most common metrics for measuring the property's performance

before taking financing into account.

A Cap Rate of 10%, for example, means that if you were to purchase that property for all

cash, you would earn 10% return on your investment.

of initial investment (plus any additional capital expenditures not financed).

Can be looked at on a Before- and After-Tax basis.

The point where Cumulative Cash on Cash passes 100% is the point where the

investor gets their entire investment back.

year and the annual debt service (total mortgage payments). This is a metric often used

by lenders to measure whether the property will generate sufficient cashflow to cover

it's mortgage payments.

Usually equals to Purchase Price minus Value of Land plus any Capital Improvements

minus Depreciation already taken.

return for a real estate investment based on its risk when compared with return earned

on competing investments.

One way to calculate such rate is to add a risk premium and a liquidity premium,

corresponding to the property, to a relatively risk-free rate such as a US Treasury bill.

This rate will be used to discount the property's expected cashflows to arrive at their

present value.

borrowing at 80% LTV, for example, with a rate of 10%, your effective mortgage rate is

8%.

A quick and useful performance measure is to subtract your effective mortgage rate

from the Cap Rate. If the result is positive, you should expect positive cashflow.

made when an income-producing property is sold.

figure represents the total rent that the property would generate given 0% vacancy.

cashflowing. Does not include capital improvements or mortgage payments.

time of purchase, market value can be computed as purchase price plus any initial

capital improvements.

present value of an investment is zero.

This metric takes into account both the timing and the magnitude of future cashflows

produced by the property

the cashflow received in the future vs the Total Cash Outlay at time of purchase.

It's called "Leveraged IRR" because it measures the return on your cash investment, not

the property. Depending upon Leverage, your investment may be big or small.

IRR gives you the rate, which if used as a Discount Rate, would produce an NPV of zero.

If your IRR result is greater than your discount rate, then the proposed investment will

yield a positive NPV, and vice versa.

property. At the time of purchase, this is usually the loan amount divided by the

purchase price.

true rate of return. The IRR measure assumes that every cashflow received over time

by investor is reinvested at the internal rate of return. So for example, if you have an IRR

of 20% at the end of year 15%, the calculation assumes that each cashflow receinved in

years 1-14 is reinvested at 20%. In reality, this may or may not be the case, since it may

be tough to constantly find other investments that yield 20%.

For that reason, it's prudent to also use the MIRR measure. This calculation allows you

to specify the cost of your capital as well as the reinvestment rate

you expect to achieve when investing the cashflows from the property.

Note that for certain under-performing investments, MIRR will actually be higher than

IRR, if you reinvest the cashflows at a higher rate than the IRR.

Expenses. This is the gauge of performance of the property before taking financing and

depreciation into account.

Property. If the NPV is positive, your Required Rate of Return will be achieved.

of Investment. If the NPV is positive, your Required Rate of Return will be achieved.

investment. * This is based on the 1st year (projected) pre-tax cashflow, and thus

though, is a good way to compare similar properties to each other.

versus your initial investment.

This figure does not take into the account the cash proceeds of a sale, and is most

relevant when used to analyze a buy and hold investment with a time horizon longer

than 20 years.

the Required Rate of Return.

If the required rate of return is equal to the buy-in Cap Rate, and NOI is expected to

remain stable, PV of property will equal the Purchase Price.

If you expect growth in NOI, PV of property will be higher than purchase price, meaning

that your Required Rate of Return will be exceeded.

including the cash proceeds of sale/disposition, discounted back at the Required Rate

of Return.

by the current amount of equity in the property.

This is sometimes used in order to determine whether to hold or sell the property. If the

equity in property grows at a faster pace than the cashflow, the ROE will diminish with

each passing year. At some point, the existing equity in the property will no longer earn

your required rate of return, even though the dollar amount of cashflow may be quiet

large and growing.

At that point, it may be worthwhile to either refi or sell the property, and invest the equity

into a better-yielding project.

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