Key financial calculations, ratios, and valuation methods used to analyze real estate investments and performance.
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Foundation terms you need to know first (92 terms)
Development costs are all the expenses incurred during the process of acquiring land, designing, constructing, and preparing a real estate project for use or sale, from start to finish.
Equity investment in real estate involves directly owning a portion or all of a property, providing the investor with an ownership stake and the potential to benefit from appreciation and rental income.
Accrual basis accounting records revenues when they are earned and expenses when they are incurred, regardless of when cash actually changes hands. This method provides a more accurate picture of a business's financial performance over time.
Base rent is the fixed, minimum rent amount paid by a tenant to a landlord for the use of a property, excluding additional charges like operating expenses, taxes, or utilities.
An office building is a commercial property designed for businesses to conduct administrative, professional, or commercial operations, offering spaces for work and meetings.
Complex strategies and professional concepts (131 terms)
Slow BRRRR is an advanced real estate investment strategy that extends the traditional BRRRR (Buy, Rehab, Rent, Refinance, Repeat) cycle over a longer period, often several years, to maximize equity appreciation and mitigate market risks.
An Equity-for-Property Swap is an advanced real estate investment strategy where an investor exchanges equity in one or more properties or entities for direct ownership of another property, often to achieve tax deferral, portfolio restructuring, or strategic asset acquisition.
The accounting process of recognizing the estimated cost of an Asset Retirement Obligation (ARO) as a liability and capitalizing a corresponding asset, which is then depreciated over its useful life, reflecting the future costs associated with retiring a long-lived asset.
A Personal Financial Stress Test is a systematic evaluation of an individual's or household's financial resilience against adverse economic scenarios, crucial for real estate investors to safeguard their portfolios.
Equity dilution occurs when a company or investment vehicle issues new shares, decreasing the ownership percentage of existing shareholders. In real estate, this often happens in syndications or partnerships when additional capital is raised.
The minimum occupancy rate an income-producing property must achieve for its rental income to cover all operating expenses and annual debt service, resulting in zero cash flow.
The Breakeven Ratio is a financial metric that calculates the percentage of a property's Gross Potential Income required to cover all operating expenses and debt service, indicating its financial resilience.
A broker commission is a fee paid to a real estate broker or agent for successfully facilitating a property transaction, typically calculated as a percentage of the final sale price. It covers services like marketing, negotiation, and paperwork, and is usually paid by the seller at closing.
Budget variance is the quantitative difference between a budgeted financial amount and the actual amount incurred or received. It's a key metric for real estate investors to evaluate performance against financial plans and identify areas for improvement.
Business finances involve the management of all money-related activities within a company, including income, expenses, profit, and cash flow, crucial for understanding investment performance.
Buy-and-hold real estate investing is a long-term strategy focused on purchasing income-producing properties to generate rental income, benefit from appreciation, and build equity over an extended period.
Buyer's premium is an additional fee charged to the winning bidder in an auction, calculated as a percentage of the final winning bid and added to the total purchase price.
Calculated risk is an investment strategy where potential financial or strategic actions are taken after thoroughly assessing, quantifying, and developing mitigation strategies for all associated risks. It's an informed decision based on data and analysis, not a gamble.
Cap rate compression occurs when the capitalization rate for investment properties decreases, indicating that property values are rising faster than their net operating income (NOI), often driven by increased demand or lower interest rates.
A capital account tracks an investor's equity stake in a real estate partnership or LLC, reflecting contributions, distributions, and their share of profits or losses.
Capital accumulation is the process of increasing one's wealth or assets over time by saving, investing, and reinvesting earnings to build a larger financial base.
Capital allocation is the strategic process of distributing financial resources across various investments or projects to achieve specific financial objectives, balancing risk and return.
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