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Investment Terminology
Flip the card to learn the definitions of some of the most commonly encountered terms in real estate investing
Net Operating Income (NOI)
a real estate term representing a property’s effective gross operating income, minus its operating expenses. Formula: Gross Income – Operating Expenses
Potential Gross Income (PGI)
The total income a property will produce if it fully leases the subject property at the prevailing market rents. Frankly, it is an ideal number, often different from the actual rent that the property produces. Formula: Monthly Income X Length of Lease (in months)
Value
Formula: Net Operating Income / Cap Rate
Debt Service Coverage Ratio (DSCR)
Formula: Net Operating Income / Debt Service (Loan Payment + Interest)
* A conservative 1.25 DSCR
* Commercial lenders use this metric to determine if they will fund a project or not
* A conservative 1.25 DSCR
* Commercial lenders use this metric to determine if they will fund a project or not
Housing Inspection License (HIL)
A license required for landlords to lease property in Philadelphia. Without this license, you cannot legally lease units to collect rent.
Depreciation
The recovery of the cost of the property over a number of years. You deduct a part of the cost every year until you fully recover its cost.
Capitalization (Cap) Rate
Calculated by dividing a properties net operating income by the current market value. This ratio, expressed as a percentage, is an estimation of an investor’s potential return on a real estate investment. Formula: Net Operating Income / Current Market Value
Effective Gross Income (EGI)
Calculated by adding the potential gross rental income with other income and subtracting vacancy and credit costs of a rental property. EGI is key in determining the value of a rental property and the true positive cash flow it can produce. Formula: Potential Gross Rental Income – Vacancy and Credit Costs
After Repair Value (ARV)
The value of a property after it’s been improved, renovated, or fixed up. It’s the estimated future value of the property after repair. ARV is determined by referencing nearby comparable properties (comps) in similar condition, age, size, build, and style that have recently sold.
Vacancy Rate
The percentage of all available units in a rental property, such as a hotel or apartment complex, that are vacant or unoccupied at a particular time.
Certificate of Rental Suitability (CRS)
A document that certifies that the the landlord’s unit is safe and habitable. Also, the unit has fire protection and smoke detectors that are in good working order.
Value Add
An opportunity to increase an assets cash flow through renovations, rebranding, or operational efficiencies, i.e., a capable team managing the property.
Reserves/Capital Expenditures (CapEx)
Funds used by a company (landlord) to acquire, upgrade, and maintain physical assets such as property.
Operating Expenses
Costs to operate real estate, which can include utility bills, maintenance, property management, etc.
Cash-on-Cash Return
A cash-on-cash return is a rate of return often used in real estate transactions that calculates the cash income earned on the cash invested in a property. Put simply, cash-on-cash return measures the annual return the investor made on the property in relation to the amount of mortgage paid during the same year.
Formula: (Net Operating Income – Annual Loan Payment) / Down Payment
Formula: (Net Operating Income – Annual Loan Payment) / Down Payment
Purchase Price (for Flips)
Formula: (After Repair Value X 65%) – Cost of Construction
*Some Investors will go up to 70% (70% Rule)
*Some Investors will go up to 70% (70% Rule)
Days On Market (DOM)
The National Association of Realtors defines DOM as the number of days from the date on which the property is listed for sale on the local brokers’ multiple-listing services (MLS) to the date when the seller has signed a contract for the sale of the property.
Appreciation
Value increasing over a period of time. Historically, this can happen naturally, without the owner making substantial upgrades.
Cash Flow
The amount of profit you bring in each month after collecting all income, paying all operating expenses, and setting aside cash reserves for future repairs.
Toon Tips with The Earnest Key Team!
Check out our latest video series for tips and advice for Philly-area investors
The Earnest Key Team is a resource for real estate investors looking to make informed decisions about the Philadelphia real estate market. Our team provides a services to advise and support investors, whether you are buying your first investment, growing your existing portfolio, or selling a property. We have expertise to guide investors making purchases for rehabs and flips, buy and holds, and rental properties, and can advise on calculating your return on investment. For those looking to purchase a property, the Earnest Key Team offers guidance on making smart investments. For sellers, We provide market analysis, property valuations, and marketing strategies to maximize returns. Our professionals offer expertise on investment areas, rehabbing properties, and building a rental property portfolio for passive income. The Earnest Key Team is a one-stop-shop for real estate investors looking to navigate the Philadelphia market with confidence.
The Earnest Key Team | Key Legacy Realty
Licensed in Pennsylvania
Key Legacy Realty
100 N 18th St, Suite 300, Philadelphia, PA 19103
