Multifamily Real Estate Investing

Glossary of Terms

Terms to Know

Multifamily

A multifamily property is any residential property that contains more than one housing unit. Duplexes, townhomes, apartment complexes, and condominiums are some of the most common examples of multifamily properties.

Capital Expenses, Capital Expenditure

Improvements (as opposed to repairs) to a fixed asset that will increase the value or useful life of that asset. A capital expenditure is typically amortized or depreciated over the useful life of the asset, as opposed to a repair, which is expensed in the year incurred. 

Debt Coverage Ratio

The debt coverage ratio is the ratio of the net operating income to the mortgage payment. If net operating income is projected to change over time, the investor typically reports the first year’s net operating income.

Net Cash Flow

Net cash flow is the annual income produced by an investment property after deducting allowances for capital repairs, leasing commissions, tenant inducements (after the initial lease is up) and debt service from net operating income. 

Real Estate Owned (REO)

A sale in which a lender, either institutional or private, sells a property that the lender has taken back through foreclosure.

Value Add Investment

An investment in a real estate asset with existing cash flow (and value) that can be increased by raising occupancy, rents or both. Owners typically carry out one or more of the following to add value to a building: improve or replace building systems, provide new finishes, introduce new amenities, improve access or circulation to the building, add square footage, etc.

Basis Points (BPs)

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

Core Investment

An investment in a high-quality real estate asset that is located in a highly accessible and highly desirable submarket. The asset commands among that submarket’s highest rents and requires virtually zero near-term capital expenditures. These assets deliver the lowest risks/rewards.

Loan to Value Ratio (LTV)

The ratio between a mortgage loan and the value of the property pledged as security, usually expressed as a percentage. 

Real Estate Investment Trust (REIT)

A company that owns or finances income-producing assets, such as apartments, shopping centers, offices and warehouses. A REIT may also invest in air or water rights, unharvested crops, permanent structures and structural components that are part of a structure but don’t themselves produce income. Shares of REITs can be traded like stocks and can allow owners of the shares to participate in the real estate market. 

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.

1031 Exchange or Like-Kind Exchange
U.S. Internal Revenue Code Section 1031 permits the deferral of capital gains taxes on the sale of property held for investment or productive use in a trade or a business. With a 1031 exchange, property owners can sell their real estate and then reinvest the proceeds in ownership of a like-kind property or several like-kind properties, thus deferring the capital gains taxes. The like-kind exchange under Section 1031 is tax-deferred, not tax-free. When the replacement property is ultimately sold (not as part of another exchange), the original deferred gain, plus any additional gain realized since the purchase of the replacement property, is subject to tax. 
Commercial Mortgage-Backed Securities

CMBS’s are a type of bond commonly issued in U.S. securities markets and backed by the cash flow from a pool of mortgages on commercial properties. The CMB’s are often arranged into groups or “tranches” according to geography, property type or underlying credit rating. 

Internal Rate of Return (IRR)

For income properties, the internal rate of return is the interest or discount rate needed to discount the sum of future net cash flows, including amortization and payments of loans and depreciation of the real property, to an amount equal to the initial equity of the property. For development projects, it is the interest or discount rate needed to convert (or discount or reduce) the sum of the development expenditures and incomes to equal zero. 

Opportunistic Investment

Ground-up development of a real estate project is considered an opportunistic investment. It is an investment in a parcel or site that typically involves some or all of the following: rezoning for use or density or both; net new or ground-up construction; conversion of a building from one use to another; complete gut or significant rehab of a building, requiring that it be entirely vacant to complete. These assets deliver the highest risks/rewards. 

Return on Investment (ROI)

A measure of the value created by a real estate investment. It is the difference between the net gains from investing in the property less the net cost from investing in the property divided by the purchase price of the property. Usually, it is reported as a percentage. 

Cash-on-Cash Return

The before tax cash flow (i.e. Cash Flow after Financing) of an investment in a given period divided by the equity invested (i.e. total equity capital invested) as of the end of that period. 

Capitalization Rate

Unlevered initial return from the acquisition of a real estate asset calculated by dividing net operating income (NOI) by the property sales price. Also known as Cap Rate. 

For example, a property’s capitalization rate (cap rate) is 10 percent if it is purchased for $10 million and produces $1 million in NOI during one year. The cap rate is typically calculated using the NOI generated in the first year of ownership so investors can normalize and compare potential returns among competing investment properties.

Discount Rate

The interest rate used in discounted cash flow (DCF) analysis to determine the present value of future cash flows. 

Net Operating Income (NOI)

The income generated after deducting operating expenses but before deducting taxes and financing expenses. 

Recapitalization

A term used when owners liquidate some or most of their ownership position in an asset by selling some or most of their equity position. 

Core-Plus Investment

An investment in a real estate asset with existing cash flow (and value) that can be increased through operating efficiencies and minor asset improvements. These are typically high-quality assets in secondary markets/locations. 

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