Here Are the 8 basic Investing Terms You Should Know Part 1

In order really understand the aspects of real estate investing, one needs to have a basic grasp of the terminology. 

Annual Average Return: the amount that is earned each year over a period of time. Oftentimes used when comparing investments. 

Cash on Cash Return: annual cash flow divided by down payment and expressed as a percentage. This is a common benchmark used to compare various investments.

Capital Expenditure/ Cap ex: An improvement, not a repair to a property such as a bathroom addition that extends the useful life of the property for more than one year. A repair is considered something that brings back the item to a proper condition. The distinction is more significant for determining cap rate or taxes.

Capital Gains: A capital gain refers to profit that results from a sale of a capital asset, such as stock, bond or real estate, where the sale price exceeds the purchase price. The gain is the difference between a higher selling price and a lower purchase price

 Capitalization rate (This term is only applied on properties that have 5+ units): The rate of return you expect to receive after expenses except for debt service (mortgage payments) and capital expenditures.

To calculate the capitalization rate you divide the Net Operating Income (NOI) by the value/purchase price of the property.

Gross Rent Multiplier/GRM: One of many quick ways to estimate a properties value in relation to other properties. To calculate divide the market value/asking price by the total yearly income.

Return on investment ROI: This is the amount of money you receive in regards to how much you invested expressed as a percentage.

Vacancy rate: This is the amount of time your rental is not occupied by a tenant expressed as a percentage. Used to assess a current property or to calculate future returns of a property.