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