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.
As a real estate investor, we must learn the real estate investing terms and investment vocabulary, and understand what they mean. Here are definitions of some of the real estate acronyms you might come across:
This is an acronym for Principal (P), Interest (I), property taxes (T) and insurance (I).
This is basically the "bottom line" or the minimum of what you need to calculate when thinking about purchasing an investment property with a loan. Usually it is calculated "overall" and for a month to month basis.
The "overall" number is what you would potentially spend on the property over the lifetime of the loan. The month-to-month is what portion of the PITI you have to pay each month to stay in good standing. This information can help you determine how much rent you should charge.
This stands for Loan-to-Value.
This is also an important one to know if you're taking out a loan for your investment property. This ratio is calculated by evaluating the value of the property, versus the sum of the loan.
For example, if the loan is $200,000 and the value of the property is $250,000, the LTV is 80%. Lower LTVs can be especially helpful if you ever need to sell the property.
Gross Operating Income is the annual rental income collected from the property. This includes rent paid on all occupied units as well as income from other sources, like coin-operated laundry facilities.
Net Operating Income is the income you receive after rent has been paid to you and after you've finished paying out all your monthly operating expenses.
Subtracting your expenses from your GOI should give you the NOI for the property. For example, if you are paid $10,000 for rent on all the units, and you spent $8,000 on maintenance, janitorial duties, supplies, accounting, insurance, taxes, and utilities, your NOI for the month was $2,000.
This is short for Debt Coverage Ratio.
This real estate investing term is commonly used by lenders, as this ratio is used in underwriting loans for income generating properties. It is calculated by dividing the NOI by total debt to be serviced. Ratios of 1.20 and higher are considered normal or average.
Conditions, Covenants, and Restrictions are things both you and your tenants should know.
These 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 conditions, covenants and restrictions written into a deed when you purchase a property.
Additionally, your tenants could sign a rental agreement in which they agree to certain conditions or restrictions (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 still an important term to learn, so I hope I'm forgiven. Either way, the acronyms listed above will hopefully be helpful in your quest to invest in real estate.
This article 6 Acronyms Every Beginner Real Estate Investor Should Know originally appeared on the BiggerPockets Blog.