Welcome to the Rowan Team's Real Estate Investment Terminology and FAQs page. Understanding key terms is essential for making informed investment decisions. Here, we've compiled a list of important terminology and frequently asked questions to help you navigate the world of real estate investment with confidence.
Key Terminology
Bread and Butter Properties
These are properties that are generally older, in need of repair, and located in poorer neighborhoods. They typically produce more income relative to the purchase price compared to pride of ownership properties.
Gross Scheduled Income (GSI)
The potential income that could be generated if all the units are rented for an entire year. This can include additional income from rented storage units or garages.
Gross Operating Income
Equals gross scheduled income minus the vacancy allowance.
Net Operating Income (NOI)
Equals gross operating income minus operating expenses.
Gross Operating Expense
The total of all expenses of the property, excluding interest expense on loans.
Net Income or Net Cash Flow (scheduled) (NOI)
The amount of money remaining after deducting all property expenses from the gross scheduled income, including real estate taxes, insurance, utilities, maintenance, interest on loans, management fees, advertising, and trash removal.
Gross Spendable Income (GSI)
Equals net operating income minus the loan payment, including principal and interest.
Gross Rent Multiplier (GRM)
The purchase price divided by the gross scheduled income per year. In Orange County, properties sell for GRMs ranging from approximately 10x gross for the worst properties to 20-25x gross in the best beach areas.
Return On Investment (ROI)
A percentage figure equaling the net income from the property per year divided by the amount invested to purchase the property.
Capitalization Rate (CAP RATE)
The rate of return from the property, obtained by dividing the net income per year by the purchase price. For an all-cash purchase, the capitalization rate equals the ROI.
Price Per Unit (PPU)
The purchase price divided by the number of units purchased.
Vacancy Allowance
A monetary allowance for potential vacancy, usually expressed as a percentage of gross scheduled income, that the property may experience over a year.
Leveraged Investment
The ability to own property worth more than the amount invested. This involves using a loan to purchase the property. Greater leverage is achieved by using a smaller percentage of the purchase price as a down payment.
Unit Mix
The composition of different unit types within a property. For example, a four-plex might include one 3-bedroom/2-bath unit, one 2-bedroom/2-bath unit, and two 2-bedroom/1-bath units.
Master Metered Building
A building with a single meter for utilities like gas or electricity. The owner pays for all utilities, often including a central hot water heater, whereas properties with separate meters have lower owner expenses.
Frequently Asked Questions
Q: What is the importance of Gross Scheduled Income (GSI)?
A: GSI represents the maximum potential income a property can generate if fully rented. It helps investors estimate the revenue potential before considering vacancies and expenses.
Q: How is Net Operating Income (NOI) calculated?
A: NOI is calculated by subtracting operating expenses from gross operating income. It is a key indicator of a property's profitability.
Q: What does the Gross Rent Multiplier (GRM) tell me?
A: GRM helps assess the value of a rental property. A lower GRM indicates a potentially better investment, as the property generates more rental income relative to its price.
Q: Why is the Capitalization Rate (CAP RATE) important?
A: The CAP RATE measures the return on investment for a property. It helps investors compare the profitability of different properties.
Q: What is leveraged investment in real estate?
A: Leveraged investment involves using borrowed funds to purchase a property. It allows investors to control a more valuable property with a smaller initial investment.
Q: How does vacancy allowance affect property income?
A: Vacancy allowance accounts for periods when units are unoccupied. It provides a more realistic estimate of income by considering potential vacancies.
Q: What is the significance of unit mix in a multi-family property?
A: The unit mix determines the variety of rental options available within a property. A diverse unit mix can attract a wider range of tenants and reduce vacancy rates.
Q: What are master metered buildings, and why do they matter?
A: Master metered buildings have a single utility meter for all units. This means the owner pays for utilities, potentially increasing operating expenses compared to properties with individual meters.