Pretty much every time you learn something new, you also learn a whole new vocabulary to go along with it. Real estate investing is no different. Real estate investors must understand the terms and investment vocabulary. Here are some definitions of common acronyms to get you started:
Principal (P), Interest (I), property Taxes (T) and Insurance (I). This is basically the “bottom line” or the minimum you need to calculate when thinking about purchasing an investment property with a loan. Usually it is calculated overall and on a month-to-month basis.
The overall number is what you would potentially spend on the property over the life of the loan. Month-to-month is the portion of PITI you have to pay each month to stay in good standing. This information will help determine how much rent you should charge.
Loan-to-Value, also important if you’re taking out a loan on your investment property, is calculated by dividing the loan by the property’s value, then expressing that as a percentage. For example, if the loan is $200,000 and the value of the property is $250,000, the LTV is 80%.
The lower the LTV, the more equity you have in the property, which means you have more room to negotiate should you decide to sell.
Gross Operating Income is the actual annual income collected from the property, which includes all sources of income (laundry, parking, storage, etc.) and takes into account any vacancies.
Net Operating Income is the income left over from your rents after paying all your monthly operating expenses. So, subtract your expenses from your GOI to get you the property’s NOI. For example, if you take in $10,000 in rents on all the units and spent $8,000 on maintenance, janitorial duties, supplies, accounting, insurance, taxes, and utilities, your NOI for the month was $2,000.
Debt Coverage Ratio is a term commonly used by lenders in underwriting loans for income-generating properties. It’s calculated by dividing the NOI by the total debt. Ratios of 1.20 and higher are considered average.
Conditions, Covenants, and Restrictions are promises written into contracts where the parties agree to perform, or not perform, certain actions.
CCRs can occur in several contexts. There can be CCRs written into a deed when you purchase a property. Also, your tenants could sign a rental agreement in which they agree to certain conditions (such as “no pets allowed” and “you can live here as long as you pay rent, otherwise we can evict you”).
I’m sorry to disappoint you on that last one. CCR on the radio is much more exciting than the real estate investing version of CCR. But it’s an important term, so I hope I’m forgiven. Either way, I hope the acronyms listed above will help you in your quest to invest in real estate.