**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