This list
is a combination of common real estate investing terms, real estate investing
best practices and tips for getting the most out of your investment property.
Annual
Maintenance
This
assumption is intended to include items such as paint, carpet, repairs, lawn
care, and utilities during vacancy, advertising etc. If you assume that the
rent will increase by 2.5% per year to adjust for inflation, your annual
maintenance assumption will also increase by 2.5%.
This could
run anywhere from %15-35% of your gross income.
Annual
Property Appreciation
This is the
percent that you expect the property to increase in value each year. The
national average for property appreciation was 6.27% in 2002.
Debt-To-Income
Ratio
This is a
formula that lenders use to determine the risk and viability of loans.
Typically the lender will divide your monthly debts (credit card payments, PITI
for houses etc) by the sum of your personal income and 75% of your rental
income (lenders assume 75% occupancy). Generally lenders want your
Debt-To-Income ratio to be below 45%.
Down
payment
This is the
amount of money that you put towards the purchase of the house. For example, if
the purchase price of the fourplex is $400,000 and you select 25% Down payment
on the you will pay $100,000 towards
the purchase of the fourplex. Higher down payments can lead to lower interest
rates and Private Mortgage Insurance (PMI). Typically lenders like to see
investors put no less than 25% down on properties that are not to be occupied
by the owner. Some investors apply for loans under the guise of owner occupied
and make 15% down payments. There are laws that apply to these types of loans
that you should be familiar with. Higher downpayments can have a small affect
on cashflow by producing a smaller mortgage payment, however higher
downpayments have a significant impact on return on investment. Consider
whether you are investing for appreciation or for cashflow and select a
downpayment that you are comfortable with.
Interest
Rate
The
interest rate that is applied to the loan.
Loan
Points
Paying a
percentage of the loan up front is a common way to buy a lower interest rate.
This can be a good strategy when you expect interest rates to rise or you
expect to own the property for more than five years. While buying points can
increase your cashflow via a lower mortgage payment it will negatively impact
your return on investment because it requires a higher initial investment.
Loan
Term
The number
of years that the loan will last. The longer the loan, the lower the payments,
the higher the cash flow.
Monthly
Cash Flow
This is
calculated on the CFP property analysis tool by first adding up all the hard
monthly expenses including: Mortgage, Property Insurance, Property Management
Fee, PMI, a monthly pro rata of your annual maintenance expense and a monthly
pro rata of the property tax. Then the missing income of vacancy is applied.
For example, if you rent your property for $1000 and you expect 90% occupancy
(10% vacancy), a $100 charge will be used in the monthly cash flow calculation
to account for the rent that will be missing over the course of the year.
Rent - (Mortgage + Property Insurance + Property Management Fees + PMI + HOA +
Maintenance + Property Tax + Pro Rated Vacancy Charge)
Occupancy
Rate
This
assumption indicates the amount of time over the course of a year that the
property has a paying tenant. When analyzing applicant’s financial strength,
lenders typically assume that investment properties will be occupied 95% of the
time. Many investors would consider this to be more conservative than their
actual occupancy rates. This assumption is used to calculate annual income and
monthly income on the property pro forma. By signing multiyear leases it is
possible to get occupancy rates in the 98% range.
Price
Per Foot
This is the
total price of the property divided by the total square footage.
Property
Insurance
Building
owners insurance required by lender to cover fire, flood etc.
Property
Management
A monthly
fee paid to a management company in exchange for operating the property. This
can include screening tenants, contracting tenants, collecting rents and
responding to tenant and property needs. Though additional fees can be incurred
for court appearances and maintenance, this fee should provide total hands off
involvement by the owner. The fee is calculated as a percentage of collected
rents.
Property
Tax
Assessed
city or county taxes based on the value of the property.
This is
simply the monthly rent divided by the square footage of the property. For
example, if a house has 2,000 square feet and the rent is $1,000 the Rent P/Ft
would be $.50.
G.R.M.
Gross Rent Multiplier: Sales price divided by
Scheduled Gross Income.
N.O.I.
Net Operating Income: S.G.I. less vacancy and
expenses.