REI Terminology

A few terms to help investors better understand the details when evaluating a potential investment opportunity. Click on each term to expand and collapse.

An accredited investor is an individual who qualifies to invest in real estate syndications by satisfying one of the requirements for of an annual income of $200,000—or $300,000 for joint income—or a net worth of at least $1 million (not including primary residence).

Compensation earned by the general partner in a syndication for sourcing, screening, arranging financing, and closing on a investment asset.

This is the opposite of passive investing. An active investor does all the work of finding, structuring, managing, and exiting investments.

This is the return on investment divided by the number of years the investment is held.

Typically a recurring fee paid from property revenues to the general partner for asset management.

Typically short-term loans enabling investors to leverage equity in one property to finance another or access cash for a down payment on a new acquisition.  

These expenses are funds used by the managing company or partners to acquire, improve, or maintain a property. Also referred to as CapEx. It specifically applies to when these funds improve the useful life of a property.

The cap rate. Calculated by dividing net operating income by current market value of a property to determine an expected rate of return.

Remaining liquid profit after deducting operating expenses and any debt service payments.

A rate of return calculated by dividing the cash flow being produced by a property by the initial cash investment.

This is the process of identifying assets and costs, and their classification for tax purposes. Applies for reducing current tax liability and deferring taxes.

Costs required to close on a real estate or financing transaction. May include origination, application, processing, underwriting, appraisal, and recording fees.

A debt investment is the investment in debt. For example, a mortgage loan. Debt investors typically earn interest until the debt is fully repaid. There may be an option to convert to equity.

The amount of loan payments required to be paid back to a lender. Also used to calculate the DSCR for qualifying for commercial real estate financing.

The DSCR is the the ratio commercial mortgage lenders use to evaluate and qualify a deal for financing. The DSCR measures how much cash flow will be available to cover debt service. A DSCR ratio of 1 means the cash flow should cover the debt payments. Lenders typically expect a minimum DSCR of 1.2 in order to get a loan. A better ratio may qualify the borrow for better terms.

These are the funds paid out to investors. These profits may be paid monthly or quarterly or upon a successful exit.

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An earnest-money deposit is placed into escrow by the buyer of an apartment building to demonstrate their commitment to execute on the purchase contract. Will be credited toward the acquisition cost at closing.

The EGI is the effective income derived by subtracting losses due to vacancy, concessions, employees, model units, and any bad debt.

The cash put into an investment. In an apartment building syndication this capital may be used toward the down payment, closing costs, borrowing costs, funding an operating account funding, along with any compensation earned by the general partners.

The EM is a way to calculate a rate of return on commercial investment property. This is calculated by dividing the total cash distributions (cash flow and cash on exit) by the equity investment made. This is a popular and easy metric to understand. If I invest $100,000 and it grows to $200,000 (including distributions and sale profits) then it’s a 2x (double my investment). If it grows to $193,000, then it’s a 1.93x. The higher the better the return. Most of the deals we review are for a typical 5 year hold period.

This is how the syndicator plans to cash investors out of their investment in the future. This may be by selling the property, purchasing their shares, or refinancing them out.

This is the same as a variable or adjustable interest rate loan. The interest rate—and typically the payments—will float and change with the market.

This is the increase in market value through an increase in NOI, which is forced by an increase in income or a decrease in expenses.

The hypothetical amount of revenue if the apartment community was leased at 100 percent occupancy year-round at market rental rates. Also known as “GPR.”

The potential income a multifamily property could produce if it had no vacancies and all leases were signed at market rates—plus any other revenue.

This calculation shows the number of years it would take for the property to pay for itself based upon the gross potential rent. This is calculated by dividing the property purchase price by the annual gross potential rent.

The holding period is the amount of time the sponsor plans to hold the property.

The cost charged by a lender for using their funds to finance a deal.

A monthly mortgage payment that only requires interest, not the principal balance, to be paid. The balance may be due on sale, refinancing, or at the maturity of the loan.

The IRR is calculated based on all future anticipated cash flow, principal pay down of debt, and proceeds on the exit of a property.

A “JV” is a partnership between two or more investment partners who collaborate on a deal.

Allows a company to utilize pass-through taxation, which shifts the income tax liability from the entity earning the income to those who have a beneficial interest in it.

A key principal in an apartment syndication is a vital person to the ongoing success of the investment. It is someone who should be insured to compensate for any interruptions if something happens to them.

An LOI is a non-binding agreement drafted by the buyer proposing their purchase terms. Typically used as a faster method to make an offer, without being tied into the deal.

In contrast to the general partner, a limited partner’s liability is limited to the extent of their share of ownership. In a typical real estate syndication, a limited partner is a passive investor who puts in capital.

The LIBOR is a benchmark interest rate that is often used to calculate loan rates and interest rate adjustments on a variable rate loan.

The LTC ratio shows the value of the anticipated loan amount against the total costs (acquisition and renovations).

The LTV calculates the ratio of the loan amount divided by the apartment building’s appraised value.

The market rent refers to the market value of a rental unit for lease based upon comparable rental rates for similar units in close proximity to the subject. Used to calculate value, cash flow, and potential loan amounts.

A MSA is a geographic region with a substantial population. These are cities pooled together with neighboring communities that have high degrees of integration. An example is the Miami Metropolitan Area. This MSA actually encompasses Miami, Fort Lauderdale, and West Palm Beach, three counties, dozens of cities, and even more neighborhoods.

Multifamily properties are a classification of housing where multiple separate housing units for residential inhabitants are contained within one building or several buildings within one complex. (AKA an apartment building)

The NOI of a property is calculated by adding up all of the incoming revenue from a property and subtracting the operating expenses.

A non-recourse loan is a loan on which the borrower is not personally signing a guarantee. The lender generally has no recourse to pursue the borrower in a default, beyond the pledged real estate collateral the loan was made on.

Operating expenses are what it costs to run and maintain an investment property. In apartment syndications, these operating expenses usually include payroll, maintenance, repairs, contractors, marketing, admin, utilities, management fees, property taxes, insurance, and capital reserves.

Also known as the private placement memorandum, this document lays out the risks, terms, and objectives of an investment, as well as documents the syndicators’ business operations and condition.

The strategy of placing your capital into a real estate syndication that is managed for you.

This is a long-term mortgage loan guaranteed by government-sponsored agencies Fannie Mae or Freddie Mac. Loans may be amortized for as many as 30 years.

Investors with preferred shares or preferred returns receive their distributions and returns up to an agreed upon percentage before the sponsor. This holds them accountable and ensures interests are aligned.

A penalty for paying off a loan balance early. These clauses can be especially complicated calculations in commercial mortgage lending.

The price per unit of in an apartment building. For example, a 100-unit building for sale at $100,000 would have a price per unit of just $1,000. It is a method of comparing competing properties, assessing value, and weighing returns between investments.

Sometimes referred to the offering memorandum, the PPM is a legal document that is provided to prospective investors that details the offering; the description of the company and how it will be managed, the use of proceeds, the risks of the investment, and the subscription terms, among other things.

A projected financial statement for estimated revenues and expenses. Often detailed for one and five years.

A recurring cost for having a professional property management company manage day-to-day operations of a property.

A RUBS system is a way to bill tenants back for utility costs. Can be based on occupancy or square footage leased.

In contrast to a non-recourse loan, this is the right of a lender/creditor to pursue the debt owed to them. A full recourse loan can expose liability to personal assets beyond the collateral in the case of a default on the loan.

Replacing a debt obligation on a property with a new loan, often with different terms.

A rent premium can be earned upon completing upgrades and renovations.

The spreadsheet or document detailing each of the units in an apartment community. A good rent roll will include unit numbers, unit types, square feet, tenant names, market rents versus actual rent, deposit amounts held, move-in dates, lease-start and lease-end dates, and current status.

To reposition a property is a strategy in which the owner, or general partner, of a property aims to change the position of the asset in a market through adding value and/or rebranding the property.

A return hurdle is the rate of return that, when achieved, triggers a disproportionate profit split. Common return hurdles are pref, IRR, and equity multiple.

The ROE is the amount of net income returned as a percentage of shareholders equity.

The ROI is the cumulative cash flow plus net resale proceeds divided by the Members’ equity contribution.

The reversion cap is the expected CAP rate at the end of an investment (or disposition of a property). It is the benefit that an investor expects to receive at the time of sale.

The typical method for estimating a property’s value based on recent similar sales in the area.

A Self-Directed IRA is technically not any different than other IRAs (or 401ks). The government created the IRA to allow investments to grow tax-free or tax-deferred compounded over time to maximize growth. The IRA can also qualify for yearly tax-deductions (depending on the account type), provide asset protection, and assets may be passed to future generations for qualifying accounts.
 
A self-directed IRA is unique due to the available investment options and because it puts the IRA owner in control.
 
Most IRA custodians only allow approved stocks, bonds, mutual funds and CDs. A truly self-directed IRA custodian allows this type of investing in addition to real estate, notes, private placements, tax lien certificates and much more.

A sensitivity analysis, also referred to as what-if or simulation analysis, is a way to predict a certain outcome given a number of variables. This is often used to show returns in the event of a market downturn (often proving that large, value-add multifamily apartments expose investors to less risk that other traditional investments).

A individual “determined” to have enough experience and knowledge to assess the risks and merits of an investment opportunity for themselves.

A split is the percentage of distributions from operations and profits from capital events that are split between the limited partner (investor) and the general partner in the syndicate deal. Splits are common in the syndication business. Typical split would be 70% payout to limited partners (investors) and 30% to the general partners after the 8% preferred return is paid to investors.

Apartment syndications are essentially real estate partnerships pairing passive investors, capital, and a syndicator (sponsor or active partner and promoter) who organizes the deal, puts it together, and manages it.

A document that is a promise by the LLC that owns the property to sell a specific number of shares to a limited partner at a specified price—and a promise by the limited partner to pay that price.

A document that is a promise by the LLC that owns the property to sell a specific number of shares to a limited partner at a specified price—and a promise by the limited partner to pay that price.

A T12 is a profit and loss statement showing the actual reported numbers for the last 12 months.

The promote refers to a ‘bonus’ of sorts used to motivate the sponsor to exceed return expectations and reward them for their work in finding, managing and adding value to the property. It is an extra, disproportionate share of returns rewarded to the sponsor.

A process of evaluating an apartment building community to determine the status, value, risks, and potential.

How much potential revenue and cash flow is lost due to vacant units.

The percentage of vacant units in a multifamily community.

The term value-add is used to describe a property that offers the opportunity to increase cash flow or FMV through renovations, rebranding, or increased operational efficiencies.

The waterfall structure is a method for splitting profits among partners in a business deal that allows for said profits to follow an uneven distribution. In a waterfall model, payouts change when previously agreed upon return hurdles are met.

Workforce housing is a term that is being increasingly used to describe housing that is affordable for households with an earned income that is insufficient to secure quality housing within a reasonable proximity to a workplace.

A properly structured 1031 exchange allows an investor to sell a property, to reinvest the proceeds in a new property and to defer all capital gain taxes.