Common Real Estate Terms

Leverage

This means using other people’s money for your investments. Most often you are using the banks money, but occasionally a seller will finance your investment. In other words, “How much of your own money as a percentage of the cost of the property.”

Loan to Value Ratio (LTV)

As a percentage, the amount of the loan over the value of the property. If I put 20% down, I have an 80% “loan to value ratio.”

Gross Multiplier

Annual property rents divided into the value of the property. The higher the gross multiplier the better investment for the buyer. Note: this calculation is no longer in vogue as it was 30 years ago.

Cap Rate

Annual net income divided by the value of the property. A cap rate of 5% means you are earning 5% of the property’s value each year from rent.

Cash on Cash

The net income as a percentage AFTER paying the debt service of principal and interest.

Net Operating Income (NOI)

The income you derive from a property, after subtracting operating expenses from gross rents collected.

Debt Service

Your payments of principal and interest to the lender.

Annual Property Operating Data (APOD)

This form is used mostly for larger apartments, however it can be useful modified for smaller investments also. A standard for expenses would be 32% of the gross rents.

Multi-Family

Residential units of 2 or more. Previously referred to as apartments.

Commercial Property

While sometimes referred to as “any property that is not your primary residence,” the correct definition is a commercially zoned retail, office or industrial property.

Pride of Ownership Property

Prime property in a prime location. Often this type of property will have a lower cap rate. Investors consider it for other reasons such as potential appreciation or, sometimes, just plain ego.

Management Intensive

Properties are management intensive if they require a lot of management, care, and close observation. Maybe due to the poor condition of property, the types of tenants available, or neighborhood. This type of property is not for the faint of heart and is best left to strong professional management.

Needs a Little TLC

This overused phrase can mean anything from “could use cleaning and some paint” to “about ready to collapse”.

Some schlocky terms that are sometimes (over)used:

Alligator

A property with negative cash flow that “eats money.”

Cash Cow

A property that generates a lot of income for the owner.