---

IN JUST 5 MINUTES OR LESS TODAY, YOU’LL LEARN ⏬ :

---

Real Estate Terms Crash Course

Have you ever come across investment terms that made you literally scratch your head? 🤔

Listen. We have ALL been there! 

The truth is that real estate investing has pretty much a language all its own, and understanding the words, phrases, abbreviations, and yes, even math equations takes time and patience. 

Don’t get discouraged, okay? Because we’re here to help make things muuuuch simpler, by explaining some of the main terms you will come across as a real estate investor! 

This isn’t like the foreign language courses you took in school…

Our investment language crash course will be more fun, easier to understand and remember, and most importantly, applicable to your real estate investing success! Whether you’re learning these terms for the first time, or just need a little refresher, we’ll have you thinking, talking, and making money like a pro in no time. 

With knowledge comes confidence, with confidence comes success, and with success comes financial freedom and the lifestyle of your wildest dreams. ✨

Here’s what you’ll learn today: 

✔️ Net Operating Income (NOI): Cap Rate x Purchase Price

✔️ Capitalization (CAP) Rate: Net Operating Income (NOI) ÷ Purchase Price

✔️ Gross Potential Rent (GPR): Monthly Rent x Number of Units x 12

✔️ Debt Service Coverage Ratio (DSCR): Net Operating Income (NOI) ÷ Annual Debt Service

✔️ Loan to Cost (LTC): Loan Amount ÷ Total Cost

✔️ Economic Vacancy

✔️ Annualized Cash Flow: Net Annual Cash Flow ÷ Equity

✔️ Accounting Rate of Return (AAR): Total ROI  ÷ Years of Investment

✔️ Internal Rate of Return (IRR) 

✔️ Net Operating Expenses (NOE) 

AND How to keep expanding your multifamily investing knowledge! 

The Top 10 Terms for Multifamily Investors to Learn ASAP

NO. 1 Net Operating Income (NOI): Cap Rate x Purchase Price

First up in today’s lesson, let’s unravel one of the most pivotal terms, especially for multifamily investors: net operating income.

This is a term you definitely want to keep an eye out for when sizing up apartment investing deals. 

Why?

Because a high NOI translates to maximized returns for passive investors. 👌

Apartment syndicators seek to increase the net operating income (to get the best returns), which is achieved either by boosting property income or trimming expenses. Each syndication team will have a different strategy for boosting the NOI for multifamily investors. 

Since the equation for NOI involves the CAP rate, let’s cover that next! 

NO. 2 Capitalization (CAP) Rate: Net Operating Income (NOI) ÷ Purchase Price

In the multifamily apartment arena, the CAP rate offers a snapshot of investment returns before factoring in financing. 

It’s important to understand what a CAP rate is, because it will help you calculate how long it takes to gain back your investment in an all-cash scenario. 

We know what you’re thinking, and yes…your syndication team should provide the CAP rate for any multifamily investment deal you’re in, buttt it’s wise to know how to calculate it yourself, too. 

This is your money, after all, so being able to quickly check in with what the future of your investment looks like will come in very handy. 

NO. 3 Gross Potential Rent (GPR)?: Monthly Rent x Number of Units x 12  

Speaking of being able to peer into the future of your investment…we’re moving on to gross potential rent. 

In multifamily investing, the gross potential rent refers to how much income you would make in the ideal scenario of 100% occupancy throughout the year. To find it, you take the monthly rent, multiply it by the number of units, and then by 12. 

It will require a bit of research to find out what the going market rental rate is for your investment deal, AND a healthy bit of realism when keeping in mind that 100% occupancy is not always achievable. 

NO. 4 Debt Service Coverage Ratio (DSCR): Net Operating Income (NOI) ÷ Annual Debt Service

The debt service coverage ratio is the NOI (which we already discussed) divided by the property’s debt obligations. 

Why does this equation matter? 

Simple…it provides insights into the risk associated with a multifamily deal. A high DSCR indicates more leverage and less risk for the lender. Generally, a 1.25 DSCR is considered healthy by lenders, but here’s a super secret insider tip:  anything lower than 1.25 DSCR gets those red flags of ours waving. 🚩🚩

You want the DSCR ratio to be high enough to lower the risk for lenders, because then you can get more leverage out of them. 

Aaaand multifamily investors really love nothing more than using leverage to their advantage! 

NO. 5 Loan to Cost (LTC): Loan Amount ÷ Total Cost

Loan to cost refers to the loan amount of a property divided by the total property cost. While this is market-dependent, it’s typical to see numbers between 45-70% today. 

As a savvy multifamily investor, you want to balance your debt with exposure – maximizing returns while minimizing risks. A little wiggle room is wise here because who knows what market twists might come your way?

Pay attention to the economic climate when you’re investing. Sometimes a higher LTC is beneficial, making your debt cheap, but in turbulent times, this increases your exposure – making it tricky to pay off your property mortgage. 

NO. 6 Economic Vacancy

You might picture those motel vacancy signs when you hear the term: economic vacancy – which refers to a unit that is not being rented. In motels, those big neon signs will light up when there is or isn’t a vacancy. 

Apartments are different from motels with neon signs, though, and one of those differences is that vacancies are totally normal and expected at any given time. In fact, even though an economic vacancy means an apartment unit is not bringing in rent, it’s actually a good thing to have some vacancies. 

If every unit was full at all times, it would mean that adjustments need to be made, like raising rent for tenants. 

Low economic vacancy is a sign that conditions are too desirable, and you could be making more money! 

In our own multifamily investing deals, we usually plan for about a 10% economic vacancy rate, and factor it into our underwriting. You may come across some syndicators claiming 5-7% economic vacancy, but they are most likely just trying to make the deal sound more appealing to multifamily investors. 

The Kitti Sisters do things differently. 

Instead of skewing the numbers of investment opportunities to attract multifamily investors, we like to lead with authenticity and honesty, while letting our proven track record speak for itself! 😏

NO. 7 Annualized Cash Flow: Net Annual Cash Flow ÷ Equity

Here’s another topic where we like expectations to match the reality: Annualized cash flow. 

Annualized cash flow is the expected annual cash flow distribution that you’re projected to receive for a multifamily investing deal. It’s the really exciting number that multifamily investors can squeal about when diving into a potential deal.

While numbers are typically between 5-7% for multifamily deals, these numbers can vary. When it comes to Kitti Sisters investment opportunities, though, we’re proud to announce that our properties CONTINUE to cash flow on par with projection…and we don’t see that stopping in the future. 🤩

NO. 8 Accounting Rate of Return (AAR): Total ROI  ÷ Years of Investment

The next two terms are related, so let’s start with AAR. 

AAR is a simple equation used to calculate the average amount of money an investment earns each year by dividing years of investment by total ROI.

Here’s a quick example…

Let’s say you invest $100,000 in an apartment syndication that you totally love, has been vetted, and you’re excited to get moving on. Your sponsorship team tells you that the total ROI provided to you is $72,000 over four years. 

So that means the AAR = $72,000 divided by 4 years = $18,000 average annual return. This is a high-level estimate of what you would earn each year that your money is tied into the multifamily apartment syndication project. 

NO. 9 Internal Rate of Return (IRR) 

While AAR is popular for many apartment syndicators, the Kitti Sisters tend to gravitate towards the internal rate of return instead, because it goes a bit deeper by taking into account the time value. 

The equation for IRR is slightly more complicated, and involves the level of annual distributions for investors, the date that the property will be sold, and the price the property is expected to sell for in order to calculate the total projected return.

Is your head spinning yet? Don’t fret!  🤓🤓

When we present a new multifamily investing opportunity, we provide the AAR and the IRR for you – no calculators needed on your part. 😉

It’s good to know what you’re looking at when you see it, but don’t stress about memorizing every single equation we’re sharing today. This is all about empowering you through knowledge, not overwhelming you with mathematical formulas. 

NO. 10 Net Operating Expenses (NOE) 

Lastly, let’s talk expenses. The net operating expenses represent the total cost of operating expenses for a multifamily apartment property. 

These are expenses that are commonly referred to as basic operating expenses of your apartment complex – like property insurance, property taxes, and property management, as well as any repairs, eviction fees, legal costs, etc. 

It’s important to know how much money is going out at all times, so you can keep track of what you’re spending vs. what you’re making. 

How to keep expanding your multifamily investing knowledge 

Phew! 😌😌

We don’t know about you, but that was an absolute blast for us. Thanks for geeking out over some of our favorite investment terms. 

Remember, while it’s important to keep expanding your investment and real estate knowledge, you don’t have to know everything to get started in multifamily apartment investing. 

In fact, you can get started now, and continue to learn as you go – while you open up passive income streams to get money flowing straight to you! 🤩

Curious about how to start or level up your real estate investing journey? 

Check out the Kitti Freedom Club – an investor’s club full of resources, support, guidance, and amazing investment opportunities chosen just for you! 

We believe in empowering you with the knowledge to feel confident in pursuing your dreams and goals, but we’re also here to help make investing simpler and more accessible so nothing stands in your way!

According to the recent US Bank Outlook Survey by S&P Global Market Intelligence, bankers are more hopeful about loan growth. Yet, they remain worried about the credit quality of commercial real estate.

💹 2024 Rental Trends: Housing Insights

🧼 Bed Bath & Beyond Spaces: Hot Real Estate Moves

⭐ Anticipating Rate Cuts: Investors’ Insight

💲 Fannie Mae: Rent Payment Program Extended