Investment Terms

Read on for terms you’ll want to know as you move forward on your investing path. Ready to start? Download our How To Build Wealth Guide!

Buy, Rehab, Rent, Refinance, Repeat:

Method that investors utilize to renovate a distressed property that they’ve deemed will refinance for a greater amount than their initial capital investment. At that point, they will do a cash out refinance and invest that money in another property as a way to secure multiple properties in a quick timeframe and a steady stream of passive income.

CapEx: (Capital Expenditures)

This includes all major improvements and renovations / big ticket items that increase the value of the property. An example might be a new roof.

Cap Rate: (Capitilization Rate) Cap rate= NOI / Value

Used as a point of comparison for commercial investments to assess profitability and risk. Gives an idea of return and how long it will take to recoup initial investment.

Capital Gains Tax

Capital gains are calculated as the profit or loss that is made from the sale of a property. If there is a gain, it is then taxed based upon whether or not it is a short term (<1 year) or long term (> 1 year) gain. This is important because the tax rates for short term gains are much higher and can drastically affect the return on an investment. This is also what leads some investors to enter into a 1031 exchange.

Cash-on-Cash Return Cash Flow:

Used to assess the potential ROI for investments like commercial and rental properties. This measures the the return based upon your initial cash outlay. Annual Cash Flow (pre tax) / Total Cash Invested

Cash Flow: Cash flow= NOI- Debt Service- Capital expenses

Is the amount of cash (before taxes) that a property generates. This is the amount of take home for your investment.

Depreciation

Tax deduction that accounts for the decreased value of a property due to wear and tear over time.

Equity

The amount that you will receive on a property after all debt is paid out.

GRM: (Gross Rent Multiplier) GRM= Value / Gross potential income

A measurement that determines how long it would take for the rental income to pay for the property.

IRR: (Internal Rate of Return)

This is the estimated profit the investment may earn. The measurement is expressed as a percentage based upon cash invested. It’s typically used to assess rental properties.

LTV: (Loan to Value ratio) LTV= Loan amount / Property value

This is a percentage that measures how much your debt is compared to how much your property is worth. It is used to assess how much a property is leveraged, and the lower the percentage means you have greater equity in the property and are not at risk for being over leveraged.

A measure of profitability for an investment property. Includes all operating expenses except for mortgage payments.

ROI: (Return on Investment)

An important measurement of the profitability of an investment. It allows you to assess how much profit you have gained from your investment capital.

Net Operating Income: Gross Operating Income - Operating expenses

1031 Exchange

A tool by which a property owner can sell one property and defer capital gain taxes by swapping in another like property to purchase that meets the IRS tax rules. Investors utilize this tool often when they want to swap out a property that has a higher ROI, or consolidate multiple properties.

TVM: (Time Value of Money)

Refers to the idea that money that you have at the present is worth more than money you will have in the future.