Real Estate Investing Education Center

Top Real Estate Industry Terms

Accredited investor

An accredited investor is someone who holds a certain financial status. You are an Accredited investor if you qualify for any of the following four options:
  1.  Individuals who have earned $200,000 or more, in income over the past two years and expect to continue to do so. 
  2.  Individuals whose income, when combined with a spouse's income, totals $300,000 or more, over the past two years.
  3.  Individuals who maintain a net worth of $1 million or more, excluding the value of his or her primary residence.           
  4. An entity with at least $5 million in assets, or a business in which all equity owners are Accredited Investors.


Accessory Dwelling Unit (ADU)

An ADU is a smaller home built on the same lot of land as the primary dwelling. It could be a free-standing structure such as a guest house, or an apartment build on top of a garage. ADU’s have its own entrance but typically share the same address as the primary home. 


Appreciation

Appreciation is an increase in value of an asset. When you invest in a real estate property, the goal is for the property to appreciate in value over time, so you get return on the investment when you sell it. How much a home appreciates depends on a number of reasons, such as changes in interest rates or inflation, increased demand, weakening of supply, improvements of a home or the local real estate market.


Cap rate 

Cap rate, or capitalization rate, is the ratio between the net operating income (NOI) and the purchase price of a property. 
To calculate the cap rate, take the net operating income (NOI) and divide it by the property purchase price. Cap rate is expressed as a percentage.
 
Example: If you purchase a property for $150,000 with an estimated NOI of $12,000 in the first year. ($12,000/$150,000=0.08) That gives you a cap rate of 8%.

NOTE: A property with lower yield tend to be a safer investment, and a property with higher yield typically come with more risk. 


Cash-on-cash return

The cash-on-cash return is the cash income made on the cash invested in a property. It measures the annual return the investor made in relation to the amount of mortgage paid during the same year. 

To calculate this, take the total cash invested, minus the annual pre-tax cash flow, and the result you get is the cash-on-cash return, expressed as a percentage. (Cash invested – annual cash flow= Cash-on-cash return)


Commercial real estate

Commercial real estate is typically referred to as a business-related workspace rather than a living space, such as office building, industrial, shopping center etc. However, a residential property consisting of 5+ units is also considered a commercial property.


Growth rate

The growth rate is the rate you expect to increase the rent each year and how much an investment property is expected to appreciate in value.


Multifamily

A multi-family home is one building that contains several individual units and provide a living space for multiple families. Each unit has their own address. A residential multi family home consists of 2 to 4 units, whereas a multi family home with 5+ units is considered commercial.


Net Operating Income (NOI) 

Net operating income is the income that is generated annually from an investment property, after you deduct the property expenses.

It is calculated by taking all income, minus the operating expenses, leaving the remaining amount as the net operating income. (Income - Operating expenses = NOI) 


Net profit

Net profits are calculated by taking the total revenue of an investment, minus all expenses related to the investment, leaving the remaining amount as net profit.


Return On Investment (ROI)

The ROI metric is used to see the profitability of an investment. To calculate the ROI, take your net profit, and divide it by the total investment amount. Take the result you get, then multiply by 100, and that is your return on investment as a percentage.


Residential real estate

A residential property consists of 2 to 4 units, whereas 5+ units is considered a commercial property.


Single family home

A house providing a living space for one family only.


Syndication

Real estate syndication is when multiple people invest in a property together. With your money pooled, you can invest in bigger projects that would otherwise be out of reach. A real estate syndication has a syndicator/sponsor that is in charge of finding, purchasing, managing and selling the property. The investors that invested in the property own a percentage of the real estate and can benefit from the results without doing any of the work related to the investment.