Before investing in any industry or market one should first familiarize himself with the industry and the start to know how that particular industry works. The easiest way to learn about the industry is to learn the common terms and phrases. When you are investing in apartments or real estate you should learn the terminology in order to communicate easily with the brokers and other investors. Here are a few terms commonly used:
Accredited investors are those individuals which can satisfy real estate syndicate requirements. These requirements state that the investor should have $200,000—or $300,000 annual income or at least a net worth of 1 Million (excluding primary residence)
The general partner in the syndication charges a fee to the sourcing, screening, arranging financing and closing investment asset, this is called acquisition fee.
Completing the end to end investing activity from finding to structuring and the managing the existing investments is called active investing.
Asset Management Fee
It is a recurring fee from the property revenues given to general partner for asset management.
These are short term loans investors take in order to pay for down payments of new acquisitions or leverage equity in one property to finance another.
Capital expenditures also known as CapEx are the funds used by partners or managing company to improve or maintain a property.
In order to determine the expected rate of return capitalization rate is calculated by dividing net operating income by current market value of the property.
Cash available after paying debt services and all the expenses is the liquid profit, we call all this cash flow.
The classification of costs and assets for tax purposes is known as cost segregation.
All the costs inquired have to be cleared before closing a real estate. These include application, processing, appraisal and recording fees.
Investing in debts such as mortgage loans is known as debt financing. Like any other loan you have to keep on paying interest until you return all the loan.
The actual amount that is required to be paid back to the lender, this includes the interest.
Debt Service Coverage Ratio
The minimum DSCR then lenders expect is 1.2. Debt service coverage ratio is calculated to evaluate and qualify a deal for financing.
Distributions are the funds usually paid monthly or quarterly to investors.
The tasks required to screen and evaluate a property such as appraisals, surveys, title work and inspections. These are performed to satisfy lender underwriting requirements.
It is the sum of money kept is placed into escrow to confirm the commitment of the buyer to purchase the property, this is returned once the transaction is completed.
Effective Gross Income
It is the income calculated after deducting all the bad debts and losses due to concessions, model units etc.
The cash input in the investment i.e. the apartment building including down payment, operating costs and even the compensation earned by management.
Equity multiple also known as the rate of return on equity is calculated by dividing cash dismemberment by equity investment made.
Syndicator may buy investors shares, sell property of refinance them out.
Floating Interest Rate
Interest rate float with the change in the market.
Gross Potential Rent
It is the assumed amount that the building would produce on rent based on the assumption of 100 percent occupancy throughout the year.
Gross Potential Income
Assumed income if the apartment building had no occupancy and all apartments were leased on market rate.