As we mentioned during part one (1) of this post, the terminology required to fully understand real estate is never ending. Nonetheless, it is critical to understand the basic terms to ensure that one can navigate discussions with other real estate professionals and investors. This section will focus on helping you learn about the profitability and feasibility of the acquisition of certain assets. By this, we are referring to understanding terms such as equity multiple, cash on cash return, cap rate, gross rent multiplier, among others. In the words of Warren Buffett, the more you learn, the more you earn.
Here they are:
1. Active Investing: As an investor, you qualify, find, and close on a deal by either using your own capital or having passive investors.
2. Passive investing: As an investor, you place your capital with an active investor and receive returns based on the offering provided by the active investor.
3. Accredited Investor: As an investor, you are accredited if you have an annual income of $200,000 or $300,000 if including joint income with your spouse (accurate for the past two years and with the expectation to earn the same amount or higher going forward). Another option is to have a net worth that exceeds $1,000,000 either individually or jointly.
4. Sophisticated Investor: As an investor, you are sophisticated if you do not meet the requirements for an accredited investor but have investing experience and knowledge to weight the risks and merits of an investment opportunity.
5. Distributions: As an investor, a distribution is the portion of the profit that belongs to you (typically based off amount invested and agreed upon terms) and that have some type of regular cadence.
6. Preferred Return: As an investor, this is the threshold return that is offered to a limited partner before the general partner sees any distributions.
7. Cash on cash return: This is the rate of return based off the total equity investment and annual cash flow.
8. Internal Rate of Return: This is a return that considers the time value of money (i.e., a dollar today is worth more than a dollar tomorrow). It is the rate needed to convert the sum of all future uneven cash flows to equal the initial equity investment (where the net present value is equal to zero).
9. Equity Multiple: This is the rate of return based off the total net profit and the equity investment.
10. Cap Rate: The rate of return based on the income that a property is expected to generate.
11. Appreciation: An increase in the value of an asset over time. This can either occur naturally due to market conditions or it can be forced (i.e., rent increases – this applies to commercial real estate).
12. Occupancy: This considers economic and physical occupancy. Economic occupancy considers the rate of tenants that are paying rent. Physical occupancy looks at actual number occupied units (compared to total units).
While part two (2) of this blog contains many of the high-level terms that are important to know in real estate, it is important to note that there are many additional terms and phrases and lingo that are thrown around by real estate investors and real estate professionals. While it is difficult to create an exhaustive list of real estate terms, part one (1) and two (2) of this series should well equip you for having high-level conversations. As we have stated many times before, we always encourage individuals to be life-long learners, to ask questions, do their own due diligence, and to always consult with professionals (e.g., legal, investment, etc.).
Sources: 1. Carrillo, Cristian, https://quetzalcapitalgroup.com/
2. Joe Fairless
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