Helpful Terms and Definitions for Understanding Commercial Real Estate
Off Market Commercial Real Estate
Loan to value – Loan to value is a calculation typically used in the financing of real estate. It calculates the amount of the loan as a percentage of the price. For example: If a loan officer tells you he can get you 75% LTV on the purchase of a new multifamily property it means he is able to loan up to 75% of the purchase price of the property. For more information, please refer to our detailed report “Identifying High Performance Real Estate Investements.”
Underwriting – Underwriting is an industry term referring to financially analyzing investment real estate.
Disposition – Disposition is the disposing of a property or selling or getting rid of real estate.
Acquisition – Acquisition is the acquiring of a property or the purchase of real estate.
Break-Even – The break-even point is when the income equals the expenses of an investment property. It can often times be referred to as a function of occupancy. For example: if at 75% occupancy your investment property brings in enough income to equal the expenses, this is referred to as the break-even point. For more information, please refer to our detailed report “Identifying High Performance Real Estate Investements.”
Capital Expenditures – Capital expenditures are funds used to upgrade physical assets that are not part of normal repairs and maintenance. This type of capital outlay is made by companies to maintain or increase the property. These expenditures can include everything from replacing a roof to buying new appliances for a rental unit. Capital expenses have a useful life and can be depreciated. For more information on Capital Expenditures, please refer to our articles on the topic here
Cash on Cash Return – Cash on cash return is a unit of measurement for return on investment showing an investor how fast his cash investment is being returned to him or her. It calculates the cash return an investor receives from the cash flow of the property divided by the amount of cash invested in the asset. Cash on cash return is displayed as a percentage and is typically calculated on a yearly basis. For more information, please refer to our detailed report “Identifying High Performance Real Estate Investements.”
Sponsor – The sponsor is the person that will be responsible for the investment and signing on any loan documents.
Debt Coverage Ratio – The ratio of cash flow (before loan payments) to the loan payment. This ratio is used by lenders to determine how much they will lend on an investment property. The DCR required by each lending institution can be different. However, normal lending guidelines require a DCR of 1.2 or greater. A DCR of 1.2 would mean that the property generated revenue after expenses of at least 1.2 times more than the debt service payments (loan payments). For more information, please refer to our detailed report “Identifying High Performance Real Estate Investements.”
Cash Flow – Cash flow refers to the amount of income that is left after taking the rental income and subtracting all expenses including debt service. What is left is called the cash flow. It can be expressed as a positive or negative number. Example: If your property brings in $1,000 per month in income and $500 a month in expenses, the cash flow would be $500/month. For more information, please refer to our detailed report “Identifying High Performance Real Estate Investements.”
Price Per Unit = Refers to the price of the property divided by the number of apartments. It is used to compare the value of the property compared to other similar properties. Example: $2,000,000 apartment complex with 80 units would be $25,000 per unit.
Expenses Per Unit – Expenses per unit refers the annual expenses of an investment property divided by the number of apartments or units. Expenses for multifamily properties are often broken-down by the overall expenses per unit as well as the expenses per unit of individual expense areas such as repairs and maintenance, payroll, administrative fees, etc.
Unit – Unit is an industry term for an apartment. Unit = Apartment. Example: A 40 unit apartment is an apartment complex with 40 apartments.
Repositioning – A “repositioning” is an real estate investment strategy where as the owner trys to change the position of the property in the market place. Usually attempting to add value to the asset. It could be changing the physical appearance, the operations, or the general attitude around of the property. For more information on repositionings, check out our article “Repositioning Your Investment Property for Big Profits.”
Net worth – Net Worth is the amount by which an individual’s assets exceed their liabilities. For more information on Net Worth, please refer to Investopedia here
Liquidity – Liquidity refers to the degree to which an asset or security can be converted to cash. Assets that are very liquid are stocks, certificates of deposit, treasuries, or securities. Assets that are considered illiquid are real estate because they cannot be turned into cash quickly. Liquidity can also be used by lenders as a term to refer to how many of your assets are liquid.
Accredited Investor – Accredited Investor is a term used by the Securities and Exchange Commission (SEC) to refer to investors who are financially sophisticated and have a reduced need for the protection provided by certain government filings. An individual can qualify as an Accredited investor if they meet at least one of the following:
Earn an individual income of more than $200,000 per year, or a joint income of $300,000, in each of the last two years and expect to reasonably maintain the same level of income.
Have a net worth exceeding $1 million, either individually or jointly with his or her spouse (without including equity in your personal residence).
Be a general partner, executive officer, director or a related combination thereof for the issuer of a security being offered.