When you start exploring the world of real estate investing, you will probably encounter a lot of confusing lingo and jargon that doesn’t make much sense when you are starting out. So we are here to help make heads and tails of a few things to get you started! Lets begin!
Net Operating Income – NOI
Net operating income (NOI) is a property’s ability to be profitable. You find it when you estimate the property’s revenue and subtract all operating expenses such as repairs, maintenance, property taxes, HOA fees, etc. The one thing NOI does not take into account is mortgage.
Your revenue – operating expenses = NOI
Cap Rate
This term shows the ratio between a property’s value and its NOI. The cap rate formula is used for two purposes: To calculate a property’s cap rate, or by transposing the formula, to calculate a property’s reasonable estimate of value.
Net Operating Income ÷ Market Value = Cap Rate
Or,
Net Operating Income ÷ Cap rate = Market Value
Gross Rental Yield
Gross rental yield is the total income generated by a property, divided by the price paid for the property and associated closing costs. This is before you deduct the operating cost. Gross rental yield provides investors with a quick reference for an annualized return on an investment.
Monthly rents x 12 ÷ purchase price and associated closing costs = Gross yield
Turnkey Property
A turnkey property is an apartment building that is move in ready. It needs little to no repair and is not in need of any major upgrades. Turnkey properties hold a great appeal because you can begin to turn a profit as soon as you acquire the property.\
Add Value Property
An add value property is a property that can be improved upon in order to increase the value.
Internal Rate of Return (IRR)
This popular model creates a single discount rate whereby all future cash flows can be discounted until they equal the investor’s initial cash investment. In other words, when a series of all future cash flows is discounted at IRR that present value amount will equal the actual cash investment amount.
Gross Debt Service
Gross Debt Service is the amount of money needed to pay principal, interest and taxes, and sometimes energy costs.
Net Operating Income ÷ The Annual Debt = Gross Debt Service
Debt-to-Equity Ratio
Figuring out what your debt-to-equity ratio helps you measure your ownership of a property; how much you own and how much you owe in debt. This is important because it give you a complete picture of your investment. It will let you know how much you’ve invest versus how much you owe and roughly the amount you can expect to walk away with should you decide to sell. It is also important because when considering refinancing.
Are you new to investing and looking for a way to get involved with multifamily investing? Are you interested in investing in add value properties that happen to be situated in popular housing markets? Magnolia Design Properties is a real estate investment company that is honed in on add value multi family properties in the B and C class and we would love to have you join us in investing! Let us do the heavy lifting of property acquisition, and head over to our contact page and fill out the form so that we can contact you with information about investment opportunities that you can join us in!
