Real Estate Investment and Analysis Flashcards

A collection of vocabulary flashcards covering initial period ratios, cash flow statement components, real estate investment terminology, and property flipping principles.

Operating Expense Ratio (OER)

A performance ratio calculated as $\text{TOEs}/\text{EGI}$, typically falling in the $25\%$ to $40\%$ range, where a lower ratio is preferred.

Debt Coverage Ratio (DCR)

A performance ratio calculated as $\text{NOI}/\text{DS}$, with a typical guideline of $\text{DCR} > 1.25$ to $1.35$.

Breakeven or Default Ratio (BE/D)

A performance ratio calculated as $[\text{TOEs} + \text{DS}] / \text{EGI}$, with a typical guideline benchmark of $\text{BE/D} < 0.9$.

Capitalization Rate (Cap Rate)

An annual return or ROI calculated as $\text{NOI}/\text{Price or Value}$, or represented as $\text{Value} = \text{NOI}/\text{Cap Rate}$.

Equity Dividend Ratio (EDR)

Also known as Equity Capitalization Ratio (ECR) or 'cash on cash' return; calculated as $\text{BTCF}/\text{Initial Equity } (\text{Eq}_0)$.

Mortgage Constant

A lender ratio calculated as $\text{ADS}/\text{Loan Amount}$, which serves as the 'cap rate' for lenders and is desired to be lower than the property cap rate.

Equity Multiple

A profitability metric calculated as $\text{Total Cash Distributed}/\text{Total Invested}$.

Debt Capital

The borrowed funds owed on a property, commonly used in real estate because most investors lack upfront capital.

Equity Capital

The actual ownership share or amount owned by the investor in a property.

Investment

The pursuit of a future return achieved by delaying current consumption and taking risk.

Real Estate Investment

The use of debt and/or equity to purchase an income-producing property (with the exception of REITs).

Holding Period

The duration of time an investor owns a property, often lasting $5$ to $6\text{ years}$.

Discount Rate

The investor's required rate of return; the cap rate must exceed the discount rate for a property to be considered a good investment.

Cash-Flow from Operations

On-going income generated from rent collection minus the payment of operating and other expenses.

Cash-Flow from Reversion

The cash or profit received when an investment property is sold.

Potential Gross Income (PGI)

The maximum possible rental income a property can generate before accounting for vacancy or operational losses.

Effective Gross Income (EGI)

The anticipated income from the operation of a property after adjusting Potential Gross Income for vacancy and collection losses.

Fixed Expenses

Operating expenses that do not fluctuate based on property occupancy, such as property insurance and taxes.

Variable Expenses

Operating expenses that change based on property occupancy and use, such as maintenance and utilities.

Replacement Reserves

Funds required by banks to be set aside for the repair and replacement of short-lived items, such as roofs, water heaters, and heat & air systems.

Net Operating Income (NOI)

The income remaining from property operations after vacancy and operating expenses have been subtracted from income.

Before-Tax Cash Flow (BTCF)

The remaining operational cash flow after paying debt service.

After-Tax Cash Flow (ATCF)

The remaining cash flow after income taxes have been paid.

Property Flipping

The investment strategy of buying low and selling high following property renovations and repairs.

As-Repaired Value (ARV)

The estimated sales price of a flipped property after all repairs and renovations have been completed.

70% Rule

A property flipping rule of thumb stating an investor should pay no more than $70\%$ of the as-repaired value minus the repair costs.

Bridge Financing

Short-term financing, typically lasting for about a year, used to bridge the period between purchasing a property and selling it.