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Investment Terminology

There are many specific terms relevant to residential investment property. For most property owners, the most important deal with the money – does the property make money or not?

Below are some of the most common and a complete list is available at investopedia.

(www.investopedia.com)

cap rate: The capitalization rate is essentially the rate of return an investor can expect on the initial investment in the property. Capitalization Rate = Yearly Income/Total Value. The cap rate provides a convenient way to compare properties at a glance, but should not be used exclusively as a method of determining property value.

cash flow: The net amount of money you keep from the gross rent at the end of each month after all expenses are paid for.

cash-on-cash return: The amount of money an investor earns at the end of the year as a percentage of the initial capital investment. Similar to the APR on money deposited at a bank.

gross rent multiplier: A number used to compare the value of one property to another by dividing the price by the gross annual rental income. The GRM provides a convenient way to compare properties at a glance, but should not be used exclusively as a method of determining property value.

one percent rule: A general guideline for investors to know if a property is likely to break even or not. If the monthly rental income exceeds 1% of the loan amount, then the investor can expect to not lose money each month.

tenant estoppel certificate: A statement completed and signed by a tenant prior to a sale stating the amount of rent paid, amount of security deposit, length of tenancy, etc. This protects the new owner and the tenant from any misunderstandings regarding who owes who money.

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