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Ch. 19
Vocab: Basic Real Estate Investment
| Term | Definition |
|---|---|
| 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
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