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Multifamily Real Estate & Investing

Glossary of Terms

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A

  • Absorption Rate

    The rate at which available space is sold in a specific real estate market during a given time period. It is calculated by dividing the total number of available space by the average number of sales per month. The figure shows how many months it will take to exhaust the supply of space on the market. A high absorption rate may indicate that the supply of available space will shrink rapidly, increasing the odds that a property owner will sell a piece of property in a shorter period of time.

  • Absorptions

    The net change in the total count of leased apartment units.

  • Apartment

    A residential rental unit situated within a structure comprising five or more units.

  • Assisted Housing

    A privately owned rental property that, thanks to government support, provides housing for low-income residents who would otherwise struggle to meet market rent prices. This support can take two primary forms: Property-based assistance: The property owner receives government aid in the form of mortgage insurance, a reduced mortgage interest rate, or tax incentives to make affordable housing available. Resident-based assistance: Low-income residents receive various rental subsidies to help them afford housing in this privately owned property.

B

  • Basis Points (BPs)

    Values equal to one-hundredth of one percentage point. For example, 100 basis points = 1 percentage point.

C

  • Capital Expenses/ Expenditure

    Enhancements made to a fixed asset that elevates its value or extends its useful life are considered capital expenditures. These investments are usually amortized or depreciated over the asset's expected lifespan, in contrast to repairs, which are expensed in the fiscal year they are carried out.

  • Capital Stack

    A capital stack is the structured arrangement of all debt and equity sources employed to acquire, construct, or refurbish a real estate property.

  • Capitalization Rate (or “Cap Rate”)

    The cap rate, short for capitalization rate, is a measure of real estate investment. It quantifies the relationship between a property's net operating income (NOI) and its overall value, offering an initial, unleveraged return on investment. To calculate the cap rate, divide the property's NOI by its selling price. This figure provides a real-time gauge of the percentage return an investor can expect when purchasing the property. It also proves valuable in estimating a property's worth when the cap rate of comparable properties is known.

  • Cash-on-Cash Return

    A Cash-on-Cash return is a commonly utilized rate of return in real estate deals, which assesses the cash income generated from the investment in a property.

  • Commercial Mortgage-Backed Securities (CMBS)

    Commercial Mortgage-Backed Securities are a category of bonds typically offered in U.S. financial markets. They are supported by the income generated from a collection of mortgages associated with commercial properties. These CMBS are frequently grouped into categories or "tranches" based on factors like geographical location, property type, or the underlying credit rating.

  • Concession

    An economic incentive a property owner provides to stimulate the leasing of space or the renewal of a lease. Concessions typically pertain to aspects like the rental rate, such as offering one month of free rent.

  • Consumer Price Index (CPI)

    Reported by the Bureau of Labor Statistics monthly: CPI is a gauge of the typical fluctuation in prices paid by urban consumers for a selected assortment of consumer goods and services over a period. Percentage variations in the CPI serve as one indicator of inflation.

  • Core Investment

    Investing in a top-tier real estate asset in an exceptionally accessible and sought-after submarket. This asset boasts some of the highest rental rates within its submarket and demands minimal immediate capital investment. Such assets offer the lowest risk-to-reward ratio.

  • Core-Plus Investment

    Investing in a real estate asset already generating cash flow and value, with the potential for further enhancement through improved operational efficiency and minor asset upgrades. These assets typically reside in secondary markets or locations and are characterized by their high quality.

D

  • Debt Coverage Ratio

    The debt coverage ratio measures the relationship between net operating income and mortgage payment. When projecting changes in net operating income over time, investors generally report the net operating income for the initial year.

  • Discount Rate

    The discount rate refers to the interest rate used in discounted cash flow (DCF) analysis to discount future cash flows of an investment to calculate its present value. It represents the expected rate of return that companies or investors anticipate from their investments. Evaluating an investment's net current value through discounting helps ascertain its viability.

E

  • Economic Base

    The businesses or industries that form the economic foundation of a region.

  • Equity Multiple

    An equity multiple is a financial metric used in real estate and investment analysis to evaluate the potential return on investment in private equity or real estate investments. It represents the total amount of money an investor expects to receive in return for their initial equity investment in a project or investment opportunity. The formula for calculating the equity multiple is typically expressed as follows: Equity Multiple = Total Cash Flows to Equity / Initial Equity Investment

F

  • Fair Market Rent

    The 40th percentile rental rate in a specific metropolitan area, known as the Fair Market Rent (FMR), is determined by HUD (the U.S. Department of Housing and Urban Development) using data from the American Community Survey. This figure is revised annually and is a crucial benchmark in establishing payment standards for rental assistance programs, particularly HUD's Section 8 program. To address housing cost challenges in high-cost regions, a related concept called Small Area Fair Market Rents (SAFMRs) employs the same methodology but operates at the zip-code level.

G

  • Garden Apartment

    A ground-level apartment within a standalone residential structure that is often found in single-family homes.

  • Garden-style Apartment Buildings

    Garden-style apartment complexes usually consist of structures limited to four stories in height. Each floor accommodates multiple apartments, and these buildings are often complemented by well-maintained landscaping throughout their surroundings. Typically, these complexes are designed with inner courtyards, leaving one end open, while parking spaces can be found in front of the buildings or along their perimeters. Residents access their apartments through individual entrances connected to open breezeways or share entrances via stairwells and interior hallways, linking neighboring units above and below. Each apartment is situated on a single level, and it's important to note that garden-style apartments typically do not include elevator access.

  • Gross Potential Rent (GPR)

    The total rent an owner would receive if all apartments were occupied and all residents paid the market rate for rent.

H

    I

    • Inflation

      Refers to the expansion of the money supply, resulting in a rise in the consumer price index. As the overall price level climbs, the buying power of a currency unit diminishes, leading to a decrease in the value of money. *An overall downward movement in prices is called deflation.

    • Internal Rate of Return (IRR)

      The internal rate of return (IRR) is a financial metric for evaluating investments' potential profitability. IRR represents the discount rate at which the net present value (NPV) of all cash flows becomes zero during a discounted cash flow analysis. Calculated: NPV= \sum\limits_{n=0}^N \frac {C_n}{(1+r)^n}

    J

      K

        L

        • Leverage

          The use of borrowed funds for investment purposes to enhance the potential return rate or an individual's purchasing power.

        • Liquidity

          Refers to how efficiently or easily an asset or security can be transformed into readily available cash without impacting its market value.

        • Loan-to-Value Ratio (LTV)

          The loan-to-value ratio (LTV) represents the proportion of the mortgage in relation to the property's value. It is expressed as a percentage and determined by dividing the borrowed amount by the property's appraised value.

        • Loss to Lease

          This is the disparity between the market rental rate of a unit and the most recent rent charged for that unit. When the current rental rate for a unit falls below its market value, it results in a loss to lease.

        • Low-Income Housing Tax Credit (LIHTC)

          LIHTC is a dollar-for-dollar tax credit system designed to stimulate private investment in affordable housing development, primarily targeting low-income individuals. Established under the Tax Reform Act of 1986, this program encourages using private equity to create housing options for those with limited financial resources. LIHTC housing's affordability is linked to the Area Median Income (AMI), setting a maximum rent that can be charged.

        M

        • Medium Household Income

          In any given geographic area, the median household income is the income level at which exactly half of the households earn more while the other half earn less.

        • Mezzanine Debt

          Mezzanine debt refers to a hybrid debt instrument that holds a subordinate position compared to another debt issued by the same entity. Mezzanine debt serves as a financial intermediary that fills the space between traditional debt and equity financing, and it represents one of the riskiest forms of debt, ranking below senior debt but above pure equity in the hierarchy of financial obligations.

        • Mixed-Use Development

          This refers to a form of development that combines retail, office-residential, or industrial-office residential components within one parcel or a group of land parcels.

        • Mortgage Debt Service

          This is the cash needed to cover a mortgage's principal payments, interest payments, and any additional costs related to credit enhancements, such as FHA mortgage insurance premiums or guarantee fees during a given period.

        • Multifamily

          A multifamily property is any residential real estate with multiple housing units. Examples of multifamily properties include duplexes, townhomes, apartment complexes, and condominiums.

        N

        • Net Cash Flow

          Net cash flow represents the yearly income generated by an investment property, calculated by subtracting allowances for capital repairs, leasing commissions, tenant inducements (once the initial lease term has concluded), and debt service from the net operating income.

        • Net Operating Income (NOI)

          Net Operating Income (NOI) is a frequently employed metric for evaluating a property's profitability. It is calculated by deducting all operational expenditures associated with the property from the total revenue it generates. Your NOI is generated after deducting operating expenses but before deducting taxes and financing expenses.

        O

        • Occupancy Rate

          The occupancy rate is the percentage of all rented apartment units.

        • Opportunistic Investment

          Opportunistic investments encompass the development of new structures on vacant land and extensive renovations or repurposing of existing buildings, transitioning them from one property type to another. Opportunistic properties typically involve extended lead times and do not generate cash flow in the interim. These are considered the riskiest types of investments.

        P

          Q

            R

            • Real Estate Investment Trust (REIT)

              A Real Estate Investment Trust (REIT) is a firm that holds or provides funding for revenue-generating assets, including apartments, shopping centers, office spaces, and warehouses. Additionally, REITs may invest in assets like air or water rights, unharvested crops, permanent structures, and structural components that are integral to a property but do not individually generate income. Public REIT shares can be traded like stocks, enabling shareholders to participate in the real estate market. Most REITs can avoid paying income taxes if they distribute at least 90% of their earnings to shareholders. These earnings are disbursed to shareholders through various means. Rental income is typically categorized as ordinary income, while any profit generated from property sales is considered a capital gain.

            • Real Estate Owned (REO)

              A lender, whether institutional or private, sells a property they have repossessed through foreclosure in a transaction known as a foreclosure sale.

            • Recapitalization

              In real estate, a recapitalization occurs when an investor chooses to reconfigure the financial structure, either by introducing new investors who take on debt or equity positions within the capital stack or when property owners divest a portion or a majority of their ownership stake in an asset by selling a corresponding amount of their equity position.

            • Return on Cost

              A term employed by developers to assess the viability of a project by dividing the property's return or net income by the development cost.

            • Return on Investment (ROI)

              Return on investment (ROI) is a metric that helps real estate investors evaluate whether they should buy an investment property and allows them to compare one investment to another. It is an undiscounted return over a single period expressed as a percentage of the initial capital invested. ROI = (Gains - Cost) / Cost

            S

            • Section 8 Housing

              Privately owned residential rental units can be part of the low-income rental assistance program established in 1974 as an amendment to Section 8 of the 1937 Housing Act. There are two main types of Section 8 programs: "place-based" and "tenant-based." In the tenant-based program, HUD provides rent subsidies directly to landlords on behalf of eligible low-income residents, allowing them to pay only a limited portion of their income for rent (referred to as the voucher program). Alternatively, residents may receive full rent subsidies, covering their entire rent, without having to contribute any portion themselves (known as the certificate program). On the other hand, in place-based Section 8 programs, the rental assistance is linked to a specific rental property rather than an individual household.

            • Soft Market

              This term describes a real estate market with an abundant supply of properties compared to the demand, leading to the potential for buyers or renters to secure lower prices or rents. This situation often prompts landlords to offer concessions related to rent.

            • Special Assessment

              A special assessment refers to a tax imposed by a local government to finance enhancements to public infrastructure, such as sidewalks, curbs, or other similar amenities, within a limited geographic region. Only properties that benefit directly from these improvements are subject to this tax. In a condominium or another type of common interest association, funds are collected from property owners to support significant capital expenditures, like replacing a roof, in cases where reserve funds are inadequate. This additional assessment is distinct from the routine fee assessed for the upkeep of common areas.

            • Stabilized Cap Rate

              A stabilized cap rate is the ratio between the net operating income produced by a property upon achieving target occupancy and its purchase value. Capitalization rates, or cap rates, fluctuate due to various factors, including asset quality, the consistency of revenue streams, geographical location, and the type of asset. For stabilized assets, cap rates tend to align with the prevailing market conditions and the risk associated with the asset. Such assets are characterized by full occupancy and rental rates in line with the current market rates.

            T

            • Total Operating Expenses

              All operational expenses, excluding interest, depreciation, and amortization.

            • Turnover Rate

              This metric represents the proportion of move-outs or vacated units within a defined time frame, typically one year, in relation to the total number of units within a property.

            U

            • Utility

              A utility refers to a public service encompassing essential amenities like gas, water, and electricity and commonly includes telephone and cable services.

            V

            • Vacancy Cost

              Vacancy cost denotes the rental income that could have been generated from unoccupied units had they been leased at current market rates.

            • Value-Add

              These investment properties typically exhibit minimal to negligible cash flow during acquisition. However, they hold the potential to generate significant cash flow once enhancements are made. Such properties frequently contend with occupancy challenges, management issues, deferred maintenance, or a blend of these factors. Investing in these properties requires a profound understanding of real estate, strategic planning, and continuous owner supervision. These investments are classified as moderate to high-risk ventures.

            W

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