The following descriptions summarize the basic terminology associated with multifamily property investing.
Unit Mix
Example: A 4 unit property may contain a unit mix of:
(1) 3 bedroom – 2 bath
(2) 2 bedroom – 1.5 bath
(3) 1 bedroom – 1 bath
Vacancy Allowance (%)
This is a monitory allowance to account for potential vacancies that the property may experience over the course of a year. It is normally expressed as a percentage of Gross Scheduled Income (GSI). Depending on the size of the property, vacancy allowances typically range from 3.0-5.0% of the GSI.
Price per Unit (PPU)
The Purchase Price divided by the number of Units to be purchased.
Cap Rate
The rate of return (%) from a property obtained by dividing the Net Operating Income (NOI) per Year by the Purchase Price. While the Cap Rate is an important variable, it is only one of many tools used by investors when evaluating a property. Cap Rates can vary widely depending on a property’s location, age, size, and condition.
Gross Rent Multiplier (GRM)
The price of the property divided by the Gross Rental Income per year. The lower the number, the better the potential cash flow. Properties in Southern California typically sell for gross rent multipliers in the 8.0-10.0 range on the most challenged properties in the toughest areas to as high as 20.0-25.0 on premium properties in the most desirable coastal areas.
Gross Scheduled Income (GSI)
The total amount of income that potentially could be generated if all the units remained rented for an entire year. This income could include other miscellaneous income generated from laundry equipment, rented storage units, garages, etc
Gross Operating Income (GOI)
Equals the Gross Scheduled Income minus a designated vacancy allowance. Depending on the size of the property, vacancy allowances typically run from 3.0-5.0% of the GSI.
Gross Operating Expense
The total of all operating expenses related to the property. Does not include the monthly payment or interest expense associated with any loans or mortgages against the property
Net Operating Income (NOI)
Equals Gross Operating Income minus Gross Operating Expense (not including any mortgage payments or interest expense)
Gross Spendable Income (GSI)
Also commonly known as “Cash Flow”. Equals the Net Operating Income (NOI) minus any loan payments, including principal & interest.
Total Return on Investment (ROI)
This is the total investment return on a property taking into account the portion of any mortgage payment that is applied to reducing the loan principal. This percentage is calculated by adding the net Cash Flow together with any Principal Reduction and then dividing by the total cash necessary to close.
Master Metered Building
This is a building that has only one meter for all of the gas and/or electric utilities associated with the property. Generally this means that the owner of the property pays for all of the gas or electricity used by the tenants. Many buildings have a central hot water heater, thereby causing the owner to be responsible for the cost of heating the water as well. In the case of properties having separate hot water heaters, gas meters, and electric meters, the expense charged to the owner of the property is typically less than in the case of master metered buildings.
Leveraged Investment
Financial leverage as it relates to Real Estate is the ability to own property that is worth an amount usually much greater than the amount actually invested.
Net Profit or Loss
For IRS and tax purposes (i.e., Schedule E), this is the amount of money remaining after deducting from the Gross Scheduled Income all expenses of the property including, but not limited to, the following: Property Taxes, Insurance, Utilities, Landscaping, Maintenance, and Mortgage Interest, Management, Advertising, Trash Removal, etc.
Cash-on-Cash Return (COC)
Also known as the Equity Cap Rate. This is the percentage return on just the money you personally invested, which is typically the sum of the down payment and any closing costs. This figure is derived by dividing the annual Gross Spendable Income or net Cash Flow by the total amount of money you came out-of-pocket with to purchase the property.
Estoppel Certificate
An estoppel certificate will be used to assess the existing terms of lease obligations of existing tenants in a tenantoccupied property transaction. The content of an estoppel certificate can vary widely, but it will generally ask the tenants for the following information:
- A request for a copy of the existing lease
- Date of and expiration of the existing lease
- Names of tenants
- Current monthly rent
- Security deposit
- Parking and storage allotments
- Confirmation of standard leasing terms.
Once all information is gathered on the estoppel certificate, both the tenant and landlord sign the certificate to attest to its accuracy.