Real Estate Investing Terms
Appreciation: This refers to the increase in the value of a property over time.
Cap rate: The capitalization rate is a measure of the rate of return on a real estate investment property. Calculate it by dividing the property’s net operating income by its current market value.
Cash flow: Cash flow is the difference between the income a property generates and the expenses associated with owning and operating it.
Closing costs: Closing costs are the fees and expenses associated with buying or selling a property, such as title insurance, legal fees, and property taxes.
Debt-to-income ratio: This is a measure of the amount of debt a person has relative to their income. Lenders use it to determine how much a borrower can afford to borrow.
Equity: Equity is the difference between the value of a property and the amount of debt secured by it.
Gross rent multiplier: The gross rent multiplier (GRM) is a measure of the relationship between a property’s sale price and its gross rental income. Calculate it by dividing the property’s sale price by its gross rental income.
Leverage: Leverage is the use of borrowed funds to increase the potential return on an investment. Leverage is often used to buy properties with a small down payment and finance the rest with a mortgage.
Net operating income: Net operating income, or NOI, is a measure of the profit a property generates from its operations. Calculate it by subtracting operating expenses from gross rental income.
Rent-to-value ratio: The rent-to-value ratio, or RTV, is a measure of the relationship between a property’s rental income and its value. Calculate it by dividing the property’s gross rental income by its market value.