Whether you are a first time investor or a seasoned pro, these commonly used terms are important to know.
A lease in which the tenant pays, in addition to rent, all operating expenses such as real estate taxes, insurance premiums, and maintenance costs.
Net Operating Income (NOI)
The potential rental income plus other income, less vacancy, credit losses, and operating expenses.
Capitalization Rates (Cap Rate)
A percentage that relates the value of an income-producing property to its future income, expressed as net operating income divided by purchase price. Also known as cap rate.
Internal Rate of Return (IRR)
The percentage rate earned on each dollar that remains in an investment each year. The IRR of an investment is the discount rate at which the sum of the present value of future cash flows equals the initial capital investment.
Net Present Value (NPV)
The sum of all future cash flows discounted to present value and netted against the initial investment.
The loss of utility and value of a property. This is expressed annually as 1/39 of the value of improvements (non-land portion) of commercial property and 1/27.5 of residential property.
Debt Service Coverage Ratio (DSCR)
Ratio of net operating income to annual debt service (loan payments). Expressed as net operating income divided by annual debt service. This is a basic function that lenders use to determine the maximum that they will lend on a property. This is commonly a number between 1.2 and 1.35.