Appreciation refers to the increase in the value of a property over time. Appreciation can be caused by a number of things including inflation, the increase in demand or a decrease in the supply of properties. Appreciation can also take into account added value as a result of property improvements (such as upgrading a kitchen, adding a room or a pool, etc.).

Appreciation is usually projected as a percentage of the property’s value over the course of a year.

Appreciation is usually projected as a percentage of the property’s value over the course of a year.

A first lien mortgage loan, generally with a term of 2 years or less, is used to finance a property purchase or the short-term construction or rehabilitation of a project before obtaining long-term financing or selling the property.

This popular return expresses the ratio between a rental property’s value and its net operating income. The cap rate formula commonly serves two useful real estate investing 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

CoC is the ratio between a property’s cash flow in a given year and the amount of initial capital investment required to make the acquisition (e.g., mortgage down payment and closing costs). Most investors usually look at cash-on-cash as it relates to cash flow before taxes during the first year of ownership.

Cash Flow Before Taxes

÷ Initial Capital Investment

= Cash on Cash Return

A cash flow property is an investment property that generates a surplus of money each month after all expenses have been paid. Cash flow properties are highly sought after by investors.

Commercial properties typically refer to types of properties primarily used for business activities, such as office buildings, retail centers, warehouses, and industrial facilities.

These properties are usually leased to businesses or investors rather than individual occupants. 

The value of commercial properties is often based on factors such as rental income, location, and the quality of the tenants.

A contingency is an amount of money set aside to cover unforeseen costs or changes during the construction process. 

It acts as a buffer to ensure that the project can continue smoothly even if unexpected expenses arise.

The scheduled payments on a loan include principal, interest, and other fees required by the loan agreement, such as taxes, property insurance, HOA fees, and property management fees.

The Debt Service Coverage Ratio (DSCR) is the ratio of a property's net operating income (NOI) to the debt service payments on the loan backed by the property. It is calculated by dividing the NOI by the debt service.

DSCR measures a mortgaged property's ability to meet monthly debt service payments; higher ratios indicate less risk. 

A DSCR less than 1.0x means that the property's cash flow is insufficient to cover debt payments.

Example:

• Monthly Rent: $2,300 ($27,600 annually)
• Monthly Payments: $1,600 ($19,200 annually)
• Annual Property Insurance: $3,000
• Annual Property Taxes: $3,000

DSCR Calculation:

DSCR = $27,600 / ($19,200 + $3,000 + $3,000)

DSCR =1.10𝑥

GOI is gross scheduled income less vacancy and credit loss plus income derived from other sources such as coin-operated laundry facilities. Consider GOI as the amount of rental income the real estate investor actually collects to service the rental property.

Gross Scheduled Income

less Vacancy and Credit Loss

plus Other Income

= Gross Operating Income

A first lien mortgage specifically designed for new construction projects, providing funds for land acquisition and/or construction costs.

A leveraged return is the return on an investment that takes advantage of a mortgage. It is calculated by subtracting the expenses incurred by the property (including the interest payment on the mortgage) from the income produced by the property and dividing that by the initial investment amount.

Calculation:

Leveraged Return = (Income less Expenses (including interest payment)) / 

Initial Investment Amount

This differs from the cash-on-cash return because it includes the principal paydown as part of the return.

While slightly riskier, using leverage is advantageous to investors as it provides higher returns and enables them to diversify across multiple properties. 

For example, an investor can purchase one property for $100,000. The same investor can acquire four properties of $100,000 each by putting down $25,000 on each property.

Loan to As-Repaired Value (LTARV) is a financial metric used to determine the loan amount relative to the estimated value of a property after repairs and improvements have been completed.

LTARV is used to assess the risk and potential return on investment for loans made on properties that require rehabilitation or improvement. 

A lower LTARV indicates a lower risk, as the loan amount is smaller relative to the property's improved value.

The ratio of the loan amount to the total cost (as-is land value and construction/rehab budget) of the project.

LTV measures what percentage of a property’s appraised value or selling price (whichever is less) is attributable to financing. A higher LTV benefits real estate investors with greater leverage, whereas lenders regard a higher LTV as a greater financial risk.

Loan Amount

÷ Lesser of Appraised Value or Selling Price

= Loan to Value

NOI is a property’s income after being reduced by vacancy and credit loss and all operating expenses. NOI is one of the most important calculations to any real estate investment because it represents the income stream that subsequently determines the property’s market value – that is, the price a real estate investor is willing to pay for that income stream.

Gross Operating Income

less Operating Expenses

= Net Operating Income

Operating expenses include those costs associated with keeping a property operational and in service. These include property taxes, insurance, utilities, and routine maintenance. They do not include payments made for mortgages, capital expenditures or income taxes.

OER expresses the ratio (as a percentage) between a real estate investment’s total operating expenses dollar amount to its gross operating income dollar amount.

Operating Expenses

÷ Gross Operating Income

= Operating Expense Ratio

A 1-4 unit residential property is designed to accommodate individual families or households. 

Single-family residences (SFRs) typically include detached homes with individual yards and separate entrances for each unit.

These properties are often owner-occupied or rented to a single tenant and consist of single units, duplexes, triplexes, or quadplexes on a single parcel.

A turnkey property, or TKP is a property that has been purchased, rehabbed and rented to a tenant and is now for sale to another investor. 

Turnkey properties usually cash flow from the moment the investor purchases it since the property is already rented.

The money that investors set aside to prepare for future vacancy is called a vacancy provision. It is a percentage of the monthly rent. The average vacancy provision is 6% for vacancy and 6% for maintenance.