Every industry has their own language with acronyms, industry terminology, and jargon. Real estate is no different. In this podcast for real estate investors, I go through the key terms anyone new to the market needs to know.
First and foremost you need to know what Net Operating Income (NOI) is. It is the almighty factor and standard profitability for a property. For the most part, it is consistent as it is your Top Line Revenue minus Property Expenses. Yes, these are affected by management and tenants, but it does not take into account the variety of other variables that COC does.
Now, Cash on Cash (COC) is the return on a property, which does depend on leverage, capital reserves, debt service payments, AUM fees, deal related fees, etc. In short, there are a lot of factors to consider when calculating the COC.
Second most important term is Cap Rate. Cap Rate a way to look at the yield on a property if it is unlevered? There are a ton of different terms when it comes to Cap Rate because of the various nuances that are simply based on what time you are looking at in a property’s life span. The two main types of Cap Rate you need to be concerned with are: In Place Cap Rate, which is what has happened within the last 12 months of a property, and Going in Cap Rate, which looks at the first year of operations as an estimate and projection.
An Unlevered Yield is when no debts are on a property and explains what the return percentage on a property is. In other words, it’s another way to look at Cap Rate, but in a percentage.
Pro Forma is the cash flow projection month by month and Underwriting is a way of creating a Pro Forma document. There are a lot of assumptions made in both these processes–any projection is and any bank and investor wants to see these numbers when considering a property.
Who are the Real Estate Actors when it comes to organizing and participating in a deal? There are two main players: the General Partner (GP) and Limited Partner (LP). The GP is the sponsor in real estate private equity. They find and organize the deal, executing it and doing the work, which is what I do. The LP are simply investors. They put their cash into the deal. GPs raise their money from LPs.
Debt Service is the principal and interest payments on a loan and any related expenses, while the Lease Up Period is the time it takes for tenants to rent up your space before you reach maximum occupancy–the time frame in which you get new customers.
Now, throughout the podcast we’ll be talking about Asset Classes, or the type of real estate investments. There are a number of them: self storage (which is what I’m involved in with my company Bolt Storage), mobile home parks, industrial real estate, family, single family, medical office, etc.. Every Asset Class has their pros and cons, so be aware of them when pursuing an Asset Class.
Debt Service Coverage Ratio (DSCR) is the last major term and is the relation of the NOI to the total debt-service obligation you have on a property with principal and interest. Most banks have a comfortable number they like to stay with when considering DSCR and is another variable to consider when planning out your real estate investment strategies.
Three Key Takeaways
- Don’t be overwhelmed! These are terms for real estate investing beginners and like any beginner in any industry, it’s like drinking water from a fire hose. Repetition is key, and in The Nick Huber show, you’ll get plenty of opportunities to hear and apply these terms.
- Don’t stop learning. These are just the basics. We will dive into the details of each throughout this podcast, however, there is so much more to learn when it comes to real estate and entrepreneurship.
- If you are still overwhelmed, I have two free resources to help you better learn these terms. I have a course for NOI and Cap Rates, and another for Debt, Cashflow, and Risk. These resources and more are available at https://nickhuber.podia.com/ and are there to help you better your real estate business.
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- They recently did a capital raising survey, asking 142 senior executives at US based real estate firms, asking them a series of questions to understand the state of commercial real estate investing.
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