Beginner Real Estate investing: Key Terms

When it comes to investing in multifamily, it is important to know the key terms to analyze a deal!

Cash Flow

Cash flow is the life of investing in real estate. This is the total amount of money being transferred in and out of your properties. Simply put, this is your income minus expenses. There could be additional sources for besides just rent including laundry income if you chose to offer coin op laundry. Be conservative when estimating your income and expenses. Run them on a worse case scenario. A mistake to avoid is to just include your mortgage, insurance and taxes and your monthly expenses! Others to include possible flood insurance, repairs, vacancy, property management, and capital expenditures.

Cash flow= gross income- operating expenses

Depreciation/Appreciation

Once you purchase the property, you can identify if the property has gained value or lost value. It is not uncommon to factor in 1-3% a year for appreciation on a property. Keep in mind this is speculative and you can’t bank on appreciation when you purchase. For example if you buy a property for 300k, your property can be worth 303k to 309k after the first year.

Net Operating Income

The income on the property minus all necessary operating expenses. This is completed on a monthly basis. The noi does not include debt service costs. The Noi is a major factor of the value of the property.

Gross Rent Multiplier

To calculate this, first take the purchase price divided by the gross rents (yearly). This is best used for a quick assessment on the property. This is mostly used for commercial deals (5+ units).

Gross Rent Multiplier= purchase price/ gross rents

Cap Rate

This is the Noi/ Purchase Price. What this shows you is what return you would get if you paid cash on the deal.

Cap rate= net operating income/ purchase price

Final Thoughts

An investor today has access to many online tools. The key is to make an informed buying decision to your advantage!