Investing in real estate can feel a little overwhelming at times. In reality, it is similar to your first days in Medical school and your clinical years. If you are new to real estate the first step is to learn the language and the abbreviations. Just like learning to chart. Once you learn the language the process of real estate investing, analyzing deals and performing research becomes easier.
For example, SOB (is not Son of a *****), HPI (High Prices Inc), RR (Roger Roger), NPWT (negative pressure wound therapy, that one is real), and the list goes on. We know the language of Medicine and have forgotten how foreign that language was at first. Real Estate is the same. If you are new to the game, you need to learn the language….
Below is a list of the big hitter terms to know. The list is long, just like Medicine….
STR: Short Term Rental (ex. Airbnb/VRBO properties)
LTR: Long Term Rental (This can be single family homes, duplexes, triplexes etc)
SFH: Single Family Home
Multifamily: Duplexes, triplexes, Quads,
Large Multifamily: Apartment Complexes
Commercial Property: Real estate used for business activities. Ex. Stores, offices etc
Mixed Use Property: ex. Commercial on the bottom with residential above
COC: Cash on Cash
This is the amount of Cash (income) you receive per year vs the amount of cash you invested in the property.
For example, if you invest 100k and the property rents for 10k per year after expenses. Then your cash on cash return is 10k/100k: 10% COC. (not bad)
NOI: Net operating Income
NOI= (income –expenses) (this excludes Principle and interest)
NOI- Principle and interest (This can be calculated Monthly or multiply by 12 for Annual NOI)
Cap Rate: Capitalization rate
Cap Rate = NOI/ property value
For example, the NOI net operating income for a property is $80,000 and the property value is $1million…
Cap rate = $80,000/$1,000,000 or 8%.
The general rule: The higher the cap rate the higher the risk. Lower the cap rate the lower the risk. Lower risk = less return but safer investment.
You can use the cap rate equation to determine the value of a property.
For example: If a comparable property sells for $300,000 and the NOI for that property is $30,000 then the cap rate = $30,000/$300,000 = 10%
If your property’s NOI is $40,000 then the Market value = NOI/cap rate
Market value = $40,000/10% = $400,000 if the cap rate is 5% it would be $800,000
ARV: After Repair Value
This term is used to describe what a property will be worth after rehab. This is used during flipping, the BRRRR method and during forced appreciation. The calculation is:
ARV = current property value + value of renovations
LTV: Loan to value: This is very important when determining your ability to refi. Most banks will allow up to 70% LTV when refinancing an investment property.
Residential Loan: standard loan used for purchasing SFH, Duplex, Triplex, Quad
Commercial Loan: Required for properties 5 units and above
Private Money Loan: A loan provided by an individual or a company, not a bank
Hard Money Loan: A short-term loan with higher interest rates than standard loans. These are used as bridging loans until more stable financing can be achieved.
Closing Costs: The charges and fees paid at the end of a real estate transaction. Closing cost are in addition to the purchase price of the property.
PMI: Private Mortgage Insurance: You are essentially paying the bank’s insurance in case you default on the loan. Pretty amazing. This is applied to loans when the down payment is less than 20%.
1031 exchange: Allows a real estate investor to sell a property and avoid paying capital gains, by reinvesting the profit of the sale into a new property or properties of “like kind” with equal or greater value.
Additional Real Estate Terminology
TOT: Transient Occupancy Tax: This is a tax applied to the listing price, including cleaning fees, for Short Term Rental reservations. Airbnb will collect and pay this tax in some counties but in others it is your responsibility. VRBO describes this as a “lodging tax” and collection is the responsibility of the owner.
Forced Appreciation: Directly increasing the value of a property. This can be achieved by renovating a property, adding bedrooms and bathrooms. Forced appreciation can also be done by increasing income and decreasing expenses. This will result in an increased NOI and therefore an increased property value.
Cost Segregation: breaks down a property into components and identifies the components of the property that can be depreciated over 5, 7 and 15 years.
Bonus Depreciation: allows businesses to expense 100% of the components identified in a cost segregation study (5, 7, 15-year components) in the first year a property is acquired.
REPS: Real Estate Professional Status. (see Reps What is it Good For…)
The BRRRR method: The Buy, Rehab, Rent, Refinance, and Repeat Method
Asset Protection: Is straight forward, but not. There is an entire industry devoted to protecting your assets. There are DIY options, A la carte options, to full blown platinum packages. You can work with an asset protection program to set up your legal structure. It can be simple or complicated depending on the legal structure.
LLC: Limited Liability Company
DST: Delaware Statutory Trust
Bigger Pockets episode 324 with Michael Blank is excellent and covers the above topics in detail. This episode focuses on Multifamily investing and covers the major principles of real estate investing.
Bigger Pockets episode 364 with Avery Carl discusses STR investing combined with long term passive income investing.
Bigger Pockets episode 416 focuses on commercial real estate and how to rapidly scale a commercial property portfolio.