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Ch. 19

Vocab: Basic Real Estate Investment

TermDefinition
Appreciation An increase in property value.
Before Tax Cash Flow Amount of cash (cash flow) remaining after deducting the payment of debt service (principal & interest) from the net operating income. =NOI - debt (P&I) * Also referred to as: a cash flow after debt service & cash throwoff.
Cash Flow Regular income produced by a rental prop. after deducting operating expenses & debt service (amt. of readily spendable cash left after all operating expenses + debt service obligations are paid). = Income produced - Operating Expenses - Debt Service
Cash on Cash The relationship of the cash flow generated relative to the amount of cash invested in order to acquire the investment. It's used to determine the value of a given investment. *Also known as Equity Dividend Rate.
Equity Dividend Rate Also referred to as Cash on Cash.
General Partnership (Ownership) Partners each share in the profits & losses of the partnership. + = well-chosen partnership may provide for more expertise than any 1 of investors might possess. - = Can expose ea. partner to risks from the other partners.
Leverage The use of borrowed funds, which allows an owner to control an investment greater than the owner's equity in the investment. The larger the % of borrowed money, the greater the leverage.
Liquidity The ability to quickly convert an asset (the investment) into cash.
Limited Liability Corporation (Ownership) Pop. ownership form where investors can limit their exposure to risk. LLC holds title to prop. but has flexibility to transfer title both in & out of the LLC. LLC distributes earnings to individual owners (investors) who are then taxed.
Limited Partnership (Ownership) Managing partners control operations & other limited (silent) partners give capital. Gen & Lim Partn. +:more liability protection than sole. & ability 2 raise more capital (more & larger projects) -: less flexibility/freedom to make own decisions
Net Operating Income (NOI) = Gross operating income - Operating expenses
Operating Expenses The costs of operating a property held as an investment.
Real Estate Investment Trust (REIT) A form of business trust owned by shareholders who make mortgage loans.
Return on Investment (ROI) The amount of money that is obtained relative to the amount that was initially invested.
Sole Proprietor (Ownership) Simplest form of bus. ownership. Investor is limited to the investment capital he individually can raise & is totally liable for any losses. + =max. flexibility + investor has freedom to make his own investment decisions. - =no liability protection.
Tax-Free Exchange (Tax Deferred Exchange) Trading of like-kind properties held as an investment or for use in business.
4 Basic Areas used to Analyze the Purchase of any Real Estate Investment 1. Cash flow 2. Equity & equity build up 3. Potential for appreciation 4. Tax-related benefits
3 Methods Equity is Created 1. The ability to purchase a property for less than it's worth 2. The amount of the down payment 3. The gradual reduction of loan balance through amortization.
Capitalization The process of converting net operating income (NOI) into an indication of value. Indicated value ($)= NOI / Cap rate
Corporation (Ownership) Separate legal entity, although capable of owning prop. in his own name, is owned & controlled by its stockholders. +=ea. holder's risk limited to his stock (no exposure to other investor's losses) -=double tax income (BOTH corp&holder's profits taxed)
Created by: laurenk1996