Common Real Estate Terminology and Ratios

Amortization:  The process of repaying a loan over time.

Amortization period:  the number of periods (usually years) it will take to pay off the mortgage.

Caliber:  A rough guide to the quality of a property-- A = Excellent condition and location, a lot of amenities, etc.;  B = Good.  A step down from an A property-- good location and good condition-- not quite as new, etc.; C = A property that is 10+ years old . .  may need updating, but could be in a good location; D = a property that is in a poor location . . . not much hope to improve and increase rents.

Cap Rate or Capitalization Rate:  NOI/Sales Price or Net Operating Income/Sales Price

    Cap rate is similar to the inverse of the P/E ratio or Price/Earnings Ratio discussed with stocks; the cap rate is earnings/price

Debt Service:  Interest Expense + Principal Reduction, usually over a time period (e.g., 1 year)

Example:  If a mortgage payment is $300 per year, the debt service would be $3,600 per year

Effective Gross Income (EGI):  All sources of potential income from property minus vacancy and collection losses.

Gross Income Multiplier (GIM):  Sales Price/Gross Annual Income

    Note 1:  Ideally the Gross Income used is the Gross Income for the next 12 months.  So, if a property is just sold, the GIM is calculated as follows:  Sales Price/Gross Annual Income for the next 12 months.  Clearly, this number is an estimate because the future is uncertain.

    Note 2: Gross Income is interpreted differently by different practitioners.  Some use potential gross income (all units are assumed to be 100% occupied.  Some people use effective gross income (potential gross income - vacancies).

Loan Constants:  The payment (PMT) required on a $1 loan given a specific length of time and interest rate.  The loan constant is very useful to help determine cash flows during "quick and dirty" analysis

    Example:  A mortgage, monthly payments, 30 years, 12% nominal-- PV = $1, n = 360, i = 1%-- loan constant =

Gross Rent Multiplier (GRM):  Sales Price/Monthly Rental Income

    Example of GRM usage:  Say, recent sales of properties similar to the subject property you are evaluating, had GRM's of 110 to 130.  If the subject property has rental income of $3,000 per month, the property would roughly be valued at $330,000 conservatively to $390,000 aggresively.

Loan-to-Value (LTV):  Loan Balance/Property Value

Mortgage:  a form of debt where the borrower gives the lender a lien on the property.

Net Operating Income (NOI):  Income - expenses excluding interest expense and income taxes.  That is, only operating expenses are included.

Potential Gross Income (PGI):  Total possible income from all sources of the property.  That is, 100% vacancy plus all other income generated from the property such as income from laundry.

Prepayment Penalty:  A dollar amount for prepaying or paying off a loan early.

Principal:  The original loan amount

Principal Reduction:  Mortgage Payment - Interest Paid for the period

    example:  Mortgage Payment = $300, $100 is applied to the interest payment . . . $200 is the principal reduction

Rental Income at Full Occupancy:  Rental revenue of apartments assuming 100% occupancy.  This does not include other income such as income from laundry facilities.

Reserves or Reserve for Replacements:  The annual estimated costs of capital expenditures that must be replaced but have a useful life in excess of three years.  Examples:  roof, air conditioning system, carpet, stoves, dishwashers, microwave, etc.)

Vacancy Rate = Number of units vacant/total units