Seven Terms You Need to Know Before Investing Passively

Seven Terms You Need to Know Before Investing Passively

 

As your interest in multifamily real estate investments continues to grow, it is essential to have a solid understanding of key terms that are commonly used in this industry. 

 

Knowing these terms can help you make informed decisions and maximize your returns. 

 

In this blog, we’ll cover seven key terms to know about multifamily real estate.

 

Cap Rate: The capitalization rate, or cap rate, is a metric used to determine the potential return on investment for a property. It is calculated by dividing the net operating income (NOI) by the property’s market value. The higher the cap rate, the better the potential return on investment.

 

Cash-on-Cash Return: Cash-on-cash return is a metric used to measure the cash flow generated by a property relative to the amount of cash invested. It is calculated by dividing the annual cash flow by the amount of cash invested. A good cash-on-cash return varies depending on the market and investment strategy, and typically ranges from 5-10%.

 

Class A, B, and C Properties: Class A, B, and C are designations used to classify multifamily properties based on their age, condition, and amenities. Class A properties are typically new or recently renovated with high-end amenities and command the highest rents. Class B properties are older with fewer amenities and command lower rents. Class C properties are typically older than Class B properties, in need of renovation, and command the lowest rents.

 

Value-Add: Value-add is a term used to describe a strategy that involves purchasing a property with the intention of improving it in some way to increase its value. This may involve renovations, improving property management, or increasing occupancy rates.

 

Proforma: A proforma is a financial projection that outlines the potential revenue and expenses of a property. It is typically used to estimate the future performance of a property and determine whether an investment is viable.

 

Debt Service Coverage Ratio: The debt service coverage ratio (DSCR) is a metric used to determine the ability of a property to generate enough income to cover its debt obligations. It is calculated by dividing the property’s net operating income by its annual debt service. Banks typically want to see a DSCR at or above 1.25.

 

Market Rent: Market rent is the amount of rent that a property could command on the open market. It is typically determined by analyzing comparable properties in the same market and taking into account factors such as location, amenities, and condition.

 

Understanding these key terms is essential for anyone looking to invest in multifamily real estate to help you make informed decisions, analyze potential investments, and maximize your returns.

 

 As always, it’s important to work with a knowledgeable and experienced team to help guide you through the investment process.

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