Amortization: –A gradual paying off of a debt by regular periodic installments which include interest and principal.
Assign: – To transfer interest to another party.
Assumption: -A broker might have an Assumable Loan in place ready. This could be good because a preferable loan is in place. You are basically assuming the existing loan.
Balloon Payment: -Large payment due at a certain period of time in the future, can be either 5, 7 or 10 years.
Capital Expenditure: -This is an expenditure for an asset that will improve or extend the useful life of an existing asset for a period to exceed one year. We set aside $250 per unit per year in a Capital Expenditure account.
Cash on Cash Return: -Return calculated by dividing cash flow by cash invested. We strive for a 10% cash on cash return.
Cash Flow: – Life and blood of any company. All of the property’s cash inflows less any outflows.
Certificate of Occupancy: -Issued by local government stating that property meets building code for occupancy. Vital to have.
Cost Segregation: – Identifies and reclassifies personal property to shorten the depreciation time. It will lower tax obligations.
Comparative Market Analysis: – Study performed by a broker or investor that compares similar prices in an area to determine value. We perform CMAs on rents to establish market rents in the area.
Debt Service: – Coverage Ratio Net income divided by annual debt service. Most lenders require a 1.2, but we like 1.3 or higher.
Deed: – Legal document, usually describing property that passes interest or ownership.
Deferred Maintenance: – Repairs that are left undone on a property. Look for deferred maintenance when buying property.
Due Diligence: – Investigation and verification of a prospective investment.
Due on-sale clause: – Clause that states loan is due in full if the property is transferred.
Earnest money: – A fancy term for down payment. Once your earnest money goes “hard”, the seller will keep your down payment even if the deal does not go through.
Easement: – The right to use another’s property, can either be temporary or permanent.
Expenses per Unit: – Calculated by dividing operating expenses by # of units. Our rule of thumb is 3,500 per unit for expenses on a property.
Emerging Market: –Market that is beginning to expand or grow. This is the ideal market to invest in.
Escrow Account: – An account set up by the bank to pay for taxes and insurance.
FSBO: – For Sale By Owner (FSBO) Sellers are too cheap to list with broker. These listings may be selling for less because owner may not be pricing his property correctly.
Gross Rent Multiplier: – Market Value divided by Gross Income. It is a quick way to estimating value. Not very accurate but it is a quick way to see if property is priced competitively.
Hard Money Lender: – Lenders who use private money to make loans. These lenders charge higher rates, more fees and expect higher loan to values.
Lien: – Claim against the property for payment of a debt, judgement or a mortgage.
Lis Pendens: – A lawsuit that has been filed and is questioning the title of the property.
Loan points: – A form of prepaid interest to buy down the rate of the loan.
Loan originate fee: – A fee paid to the bank to originate the loan.
Loan to Value: – Relationship between the loan and purchase price. Take the loan amount and divide by the purchase price to calculate the LTV.
Multiple Listing Service: – Database that contains properties for sale.
Net Operating Income: – Gross operating income less all operating expenses. It is a very important figure when estimating property value.
Price per Unit/Door: – Take the price of the property and divide by the number of units. We like to use this formula to gauge the value of the property.
Private Mortgage Insurance: – Also known as PMI, it is insurance provided in case the borrower defaults. If your down payment is less than 20%, insurance may be required by the lender.
Pro-forma: – This is a projection of what a property will produce in the future. Take this with a grain of salt. ALWAYS buy on actuals.
Property Types: – Different classes of property. Classes go from A to D.
A: Newest, built within last 10 years, clean, amenities, less risk, white collar workers. More expensive and less cash return.
B: Built within last 20 years, find one with more white collar and blue-collar workers, prefer white collar more.
C: Cash flow really well; appreciation is really well. What we focus on Blue collar workers, cash flow great, built within last 30 years, but the problem is a lot of maintenance and depreciation.
D: Stay away from D properties, bad areas.
Purchase Money Mortgage: – Another term for owner financing.
RUBS: – Ratio Utility Billing System. A system of allowing the tenants pay for a portion of the utilities, such as water, gas, electric and garbage.
Section 8: – Government Subsidized Housing.
Title: – A legal document establishing residence of ownership.
Title Insurance: – An insurance policy that protects against loss from arising from an ownership dispute. Every buyer should obtain title insurance when purchasing a property.
Unit Mix: – The bedroom sizes of apartments in a proper. Sizes range from efficiency, to studio, to one bedroom, to two bedroom, to three bedroom. We focus on two bedrooms units and prefer greater quantity of two beds to one beds.
Vacancy Rate: – Percent of all units that are unoccupied in the property.