Real Estate Terms You Should Know

Appreciation: This term applies to the increase in the value of your property.

Example: If you bought an apartment building for $300,000 and the current market value for the building is $400,000, there would be $100,000 of appreciation.

Basis: This term applies to any real estate that you own. The three ways you gain basis in properties are 1.) you bought the property yourself, 2.) you received the property as a gift, and 3.) you inherited the property

Example: If you bought a property for $300,000 and spent $50,000 to improve it, the total you spent on the property is $350,000. If the property depreciated by $20,000, then the basis of the property would be $330,000.

Capital Expenditures: A capital expenditure is a category of expenses that include the major repairs of a property, such as the foundation, the roof, the HVAC system or furnace. Capital expenditures are used in Cash Flow calculations.

Capital Gains: The profit that is made when an investment property is sold. The capital gains is the difference between how much the property is bought for and how much the property sells for.

Capitalization Rate Computation: Also known as the cap rate computation. Used to find the fair market value of a property.

Equation: FMV = NOI / CR

FMV: Fair Market Value

NOI: Net Operating Income

CR: Capitalization Rate

Debt Service Ratio: Debt service ratio informs you of the relationship between the Net Operating Income and the amount that is necessary to service the debt on the property.

Example: If you own a 5 unit apartment building that has a NOI of $34,000 and a mortgage of $500,000, with a monthly payment of $2,083. The annual total of the mortgage is $25,000. In order to find the debt service ratio, you would divide the NOI by the annual mortgage amount; 34,000 / 25,000 = 1.36. The debt service ratio on this property would be 1.36 or 136%.

Equity: Equity is the actual value you have in the property. It is expressed by the amount of money you profit if the property were to be sold. Equity is considered “net value” because it must be calculated.

Equation: E = FMV - MPO - L - OD

E: Equity in the property

FMV: Fair Market Value

MPO: Mortgage Payoff Amount

L: Liens on the property

OD: Other Debts on the property

Net Operating Income: Also known as NOI. The gross operating income minus the operating expenses.