Every industry has it’s own lingo. Some see it as a huge barrier to entry, and that may be true, but with the power of today’s information systems, there is no reason you can’t speak the language of real estate investing! This post is by no means a dictionary, nor is it all inclusive. Instead, I just wanted to run through a few of the most common terms you may come across and demystify them. I’m coming up with these at random, so realize they aren’t necessarily in any order. Enough introduction, let’s get started!
- Cash on Cash Return – This is a common ratio that compares A to B, where A is the cash flow for the year (before taxes) and B is the amount of money it cost to acquire the property. The number is expressed as a percentage.
- Gross Rent Multiplier – The GRM is a simple calculation. It is a quick way to asses a potential property, and is found by dividing the market value of the property by the total potential income (aka “Gross Scheduled Income”) the property could generate in a given year. Of note, you will likely need to find the GRM from a comparable property before utilizing it to analyze THIS potential property.
- Gross Operating Income – Sometimes referred to as “Effective Gross Income”, gross operating income is the total scheduled income (all income the property could ideally produce in a year) less an allowance for vacancy. In lieu of a solid property vacancy history, an investor can usually find an average rule of thumb vacancy number for that property type in that area. Vacancy rules of thumb are generally expressed as a percentage of gross schedule income.
As you can see, I can barely get through the definition of one metric without referring to another. These calculations and evaluation metrics are of vital importance to potential investors. Without a solid understanding of the entire language, neophyte investors will find themselves at a serious disadvantage when it comes to proper analysis.