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 (127 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.
Other Comprehensive Income (OCI) represents revenues, expenses, gains, and losses that are excluded from net income but are recognized in comprehensive income, reflecting changes in equity from non-owner sources. It captures certain unrealized gains and losses that bypass the income statement.
Other Comprehensive Income (OCI) recycling is an accounting mechanism where certain unrealized gains or losses initially recognized in OCI are subsequently reclassified into net income when specific conditions are met, primarily when the related asset or liability is realized or affects net income.
A cognitive bias where an individual's subjective confidence in their judgments is reliably greater than the objective accuracy of those judgments, leading to underestimation of risks and overestimation of returns in real estate investing.
Overvaluation in real estate occurs when a property's market price significantly exceeds its intrinsic value, often driven by speculative market sentiment or temporary supply-demand imbalances.
An overvalued market occurs when real estate prices significantly exceed their fundamental economic value, often driven by speculative demand, low interest rates, or irrational exuberance.
The owner-operator model in real estate investing involves an investor directly managing their own investment properties, handling all aspects from tenant relations to maintenance, rather than outsourcing these tasks to a third-party property management company.
The PAYDEX Score, from Dun & Bradstreet, assesses a business's payment history with vendors on a 1-100 scale, indicating its reliability in making timely payments. It's vital for securing business credit and favorable terms.
PITI stands for Principal, Interest, Taxes, and Insurance, representing the four main components of a monthly mortgage payment for real estate investors and homeowners. It is a critical metric for budgeting, loan qualification, and assessing the true cost of property ownership.
Passive income refers to earnings from an enterprise in which an individual is not actively involved, typically generated from real estate investments like rental properties, REITs, or syndications, requiring minimal ongoing effort after initial setup.
The Percentage of Completion (POC) Method is an accounting technique used for long-term contracts, particularly in real estate development, to recognize revenue and expenses proportionally as work progresses, rather than waiting until project completion. This method provides a more accurate representation of a project's financial performance over its lifecycle.
Performance measurement in real estate investing involves tracking and analyzing key financial metrics to evaluate how well an investment is performing against its goals and market benchmarks. It helps investors make informed decisions and optimize their strategies.
A compensation structure where a portion or all of a payment is contingent upon achieving specific, pre-defined performance metrics or outcomes, commonly used in real estate development, property management, and investment syndications to align interests.
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