Investor Glossary
Investment Terms Explained
There are a number of investment terms which you will see in our investment memoranda as well as our reporting materials. We have provided explanations of some of the more important terms below:
Gross Annual Rent:
Revenue from existing tenants based on current leases plus any vacant units priced at market rents.
Estimated Vacancy Factor:
Physical vacancy (unoccupied units, employee units) and collection losses.
Effective Annual Rent:
Gross Annual Rent less the Estimated Vacancy Factor.
Other Revenue:
Revenue from parking, cable TV fees, application fees, etc.
Utility Reimbursement:
Revenue from bill back to tenants for electricity, gas and water usage.
Effective Annual Revenue:
Effective Annual Rent plus Laundry Revenue, Other Revenue and Utility Reimbursement.
Net Operating Income (NOI):
Effective Annual Revenue less Expenses.
Debt Service:
Annual mortgage expense.
Net Cash Flow:
NOI less Debt Service
Cash-on-Cash:
Net Cash Flow/Equity Invested
Capitalization (Cap) Rate:
NOI/Price. [8% Cap Rate=$100,000 NOI/ $1,250,000 Price]. The Cap Rate is the return that the Investor would receive if he bought the property (and its NOI) all cash—with no mortgage.
Price Capitalized at 8%:
NOI/8%. [$100,000 (NOI)/ 8% (Cap Rate) = $1,250,000 Price]
Return on Investment (ROI):
Gain from Investment Less Equity/ Equity. Example: An Investor invests $100,000 of equity and receives $10,000 in Year 1, $11,000 in Year 2 and $12,000 in Year 3. The property also sells in Year 3 and the investor gets back $120,000. The ROI is equal to: $10,000+$11,000+$12,000+$120,000 LESS $100,000/ $100,000. ROI= $152,000 LESS $100,000/ $100,000. ROI= $52,000/$100,000. ROI=52%.
Internal Rate of Return (IRR):
IRR is a measure that allows the Investor to understand the value of future cash flows and final market value. It can be thought of as ROI with timing of the payments factored in. Finally, IRR can also be looked at as the rate of growth that an investment is expected to generate.