Check out our list of real estate investment terms every investor should know and add some new lingo to your lexicon. If there’s anything else you’d like to see on this list.
Annualized Return, also known as Internal Rate of Return, is a measure of annualized net return on an equity investment. It equals the discount rate at which the sum of the present value of all cash flows is zero. Calculation is based on actual and budgeted values.
Cap rate is the percentage return calculated by dividing net operating income in Year 1 by the property purchase price. Your net operating cash flow excludes your loan costs.
Example: Say you purchase a property for $150,000. The expected NOI in the first year is $12,000.
$12,000/$150,000 = 0.08
Cap rate: 8%
First year net cash flow is the estimated dollar amount received after payment for property taxes, property management, reserves for R&M, capital expenditures, and loan payments. Assuming a % of vacancy and loan payments based on the lending assumptions.
The down payment is the cash portion of the property price at the time of purchase when using leverage, or full purchase price when buy all cash. This amount is used to calculate your initial investment, and projected returns.
Estimated Investment Value Over Time:
Estimated Total Investment value over time is composed of all sources of return: Net Cash flow, Home Price Appreciation, Down Payment and Loan Balance Pay down.
The initial investment is the estimated amount of capital needed to purchase the property. This amount includes: your down payment, loan & acquisition fees, closing costs and immediate repair costs.
Gross yield is the annual income generated by an asset before any expenses, divided by its purchase price. Monthly rent x 12 months, divided by purchase price.
Rent Growth, is the year over year growth rate of rental prices, presented in annual percents.
The home price appreciation forecast
Total Return is your cash profit calculated as the sum of your estimated (i) annual net operating cash flows over 5 years, plus (ii) property net sale proceeds minus your initial investment and outstanding loan balance.
|Cum. Net CF: