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Ready to invest or interested in multifamily real estate investing? We visualize working with a knowledgeable and successful team of investors. On our resources page, you’ll find how to get started, terminology, and so much more. We invite you to join our Eagle Summit Equity Investors Club.

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Passive Investing With Raphael Ramos, Real Estate Investor

What are some tools available within your reach? Here’s my story.

I personally utilized Self Directed Retirement Accounts with Checkbook Control via a Solo 401k and SDIRA (Self Directed IRA). As a business owner with no employees, I could start a Solo 401k by transferring my previous employer’s 401k’s and converting a personal Roth IRA to an SDIRA.

This allowed me to invest as a passive investor in BRRRR (Buy, Rehab, Rent, Refinance, Repeat) and Airbnb properties and recently as a limited partner in an apartment syndication with additional storage units!

Caveats for Success:
—Always do your due diligence on the Real Estate Investor or Sponsor you are investing in.
—Consult your Self Directed Retirement Account provider and/or Tax Advisor.
—Have the goal of achieving Passive Income! Let your hard work, work for you!

Real Estate Investing General Terminology

Accredited Investor

A person who meets the individual net worth requirements and/or income requirements set forth by the SEC, and has knowledge and/or experience in financing and business matters and is capable of evaluating the merits and risks of the prospective investments.

ACTIVE INVESTOR

Finds, qualifies and closes on an apartment building using one’s own capital and overseeing the business plan through its successful execution.

ACQUISITION FEE

A fee charged to cover expenses and commissions incurred in acquiring the investment property.

AMMORTIZATION

The spread of fixed payments of principal and interest over a period of time.

APARTMENT SYNDICATION

A temporary professional financial services alliance formed for the purpose of handling a large apartment transaction that would be hard or impossible for the entities involved to handle individually, which allows companies to pool their resources and share risks and returns. In regards to apartments, a syndication is typically a partnership between General Partners (Syndicators) and Limited Partners (Passive Investors) to acquire, manage, and sell an apartment community while sharing in the profits.

APPRECIATION

An increase in the value of an asset over time. The two main types of appreciation are Natural Appreciation and Forced Appreciation.

Natural Appreciation occurs when the market capitalization rate naturally decreases over time, which isn’t always a given.

Forced Appreciation occurs when the net operating income is increased by either increasing the revenue or decreasing the expenses. Forced appreciation typically occurs by adding value to the apartment through renovations and/or operational improvements.

APPRAISAL

A report created by a certified appraiser that specifies the market value of a property. For apartments, the value is based on the cost, income, and sales comparison approach.

ASSET MANAGEMENT

The management of one or more investment assets by an institution or an individual on the behalf of others. This includes working to appreciate and maintain assets over time while minimizing risk.

ASSET MANAGEMENT FEE

An ongoing fee from the property operations paid to the General Partner(s) for property oversight. Generally, the fee is 1 to 5% of the collected income, depending in part on the asset’s size.

BREAKEVEN OCCUPANCY

The occupancy rate required to cover all the expenses at the property. This is calculated by dividing the sum of the operating expense and debt service by the gross potential income.

CAPITAL EXPENDITURE (CapEx)

Capital expenditures, or CapEx, are the funds used by a company to acquire, upgrade, and maintain a property. An expense is considered CapEx when it improves the useful life of a property and is capitalized – spreading the cost of the expenditure over the useful life of the asset. CapEx are the property’s non-operating expenses where it does not reduce a property’s net operating income or overall value. CapEx includes both interior and exterior upgrades and items such as replacing a parking lot or landscaping renovations.

CAPITALIZATION RATE (Cap Rate)

Rate of return on an investment property based on the income that property is expected to generate. Cap Rate is calculated with the Net Operating Income (NOI) divided by the Current Market Value or Sales Price.

For example, a 216-unit multifamily apartment complex purchased for $12.2 million with a net operating income of $970,125 has a Cap Rate of 7.95%.

CASH FLOW

The revenue remaining after paying all expenses. To calculate Cash Flow, subtract the Operating Expenses and Debt Service from the Effective Gross Income.

For example, a 216-unit multifamily apartment complex that has an Effective Gross Income of $2,201,395 minus Operating Expenses of $1,120,795 minus Debt Service of $575,995 will result in a $504,605 Cash flow.

CASH ON CASH RETURN (COC)

The rate of return that calculates the cash income earned on the cash invested. CoC return is calculated by dividing the cash flow by the initial equity investment.

For example, a 216-unit multifamily apartment complex that has an annual cash flow of $380,250 with a total equity investment of $4,000,000 has a COC of 9.5%.

CLOSING COSTS

The expenses, over and above the purchase price of the property, that buyers and sellers normally incur to complete a real estate transaction. Costs incurred may include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed-recording fees and credit report charges.

CONCESSIONS

The credits given to offset rent, application fees, move-in fees, and any other cost incurred by the tenant, which are generally given at move-in to entice tenants to sign a lease.

COST SEGREGATION STUDY

A Tax Deferral Strategy that identifies and reclassifies personal property assets to shorten the depreciation time for taxation purposes, which reduces current income tax obligations.

DEBT SERVICE

The annual mortgage amount paid to the lender, which includes principal plus interest.

DEBT SERVICE COVERAGE RATION (DSCR)

The ratio that is a measure of the cash flow available to pay the debt obligation. DSCR is calculated with Net Operating Income (NOI) divided by Total Debt Service.

A DSCR of 1.0 means that there is enough net operating income to cover 100% of the debt service. Ideally, the DSCR is 1.25 or higher. A property with a DSCR too close to 1.0 is

vulnerable, and a minor decline in revenue or increase in expenses would result in the inability to service the debt.

DEPRECIATION

Refers to an accounting method used to allocate the cost of a tangible or physical asset over its useful life. Depreciation determines how much of an asset’s value has been used with the passage of time such as wear and tear.

DISTRIBUTION

The Limited Partners’ portion of the profits, which are sent on a monthly, quarterly, or annual basis, at refinance, and/or at sale.

EFFECTIVE GROSS INCOME (EGI)

The true positive cash flow; also referred to as total income or total revenue. EGI is calculated by subtracting the revenue lost due to vacancy, loss to lease, concessions, employee units, model units, non-operable units, and bad debt from the Gross Potential Income.

EQUITY MULTIPLE (EM)

The rate of return based on the total net profit and the equity investment. The EM is calculated by dividing the sum of the total net profit (cash flow + sales proceeds) and the remaining equity investment at sale by the equity investment. For example, an equity multiple of 1.0 means the investor gets their initial investment back with no profit, while an equity multiple of 1.95 means the investor gets their initial investment back plus a 95% profit.

GENERAL PARTNER (GP)

An owner of a partnership who has unlimited liability. A GP is a managing partner and is active in the day-to-day operations of the business. In apartment syndications, the GP is also referred to as the sponsor or syndicator and is responsible for managing the entire apartment project.

GROSS POTENTIAL INCOME (GPI)

The total rent a property can generate if 100% leased at market rent year-round plus all other income.

GROSS RENT MULTIPLIER (GRM)

The number of years it would take for a property to pay for itself based on the gross potential rent. The GRM is calculated by dividing the purchase price by the annual gross potential rent.

For example, a 216-unit multifamily apartment complex purchased for $12.2 million divided by the gross potential rent of $2,201,395 has a GRM of 5.5 Years.

INTEREST RATE

The amount charged by a lender to a borrower for the use of their funds.

INTERNAL RATE OF RETURN (IRR)

The rate needed to convert the sum of all future uneven cash flow to equal the initial equity investment. That “uneven cash flow” can be cash flow, sales proceeds and principal pay down. Target goal is to attain an IRR that is 15% to 18% or above to the Limited Partners with a five-year exit.

KEY PRINCIPAL (KP)

Individual(s) who are guarantor(s) who help the general partnership team qualify for the loan through their net worth and/or liquidity and may or may not be active managers of the project.

LIMITED PARTNER (LP)

A partner whose liability is limited to the extent of their share of ownership. In syndications, the LP is the Passive Investor who funds a portion of the equity investment.

METROPOLITAN STATISTICAL AREA (MSA)

A geographical region containing a substantial population nucleus, together with adjacent communities having a high degree of economic and social integration with that core. MSAs are determined by the United States Office of Management and Budget (OMB).

NET OPERATING INCOME (NOI)

Equals all revenue from the property minus all operating expenses. NOI is a before-tax figure which excludes principal and interest payments on loans, capital expenditures, depreciation and amortization. NOI is calculated with the Net Income minus Operating Expenses.

OPERATING EXPENSES

The ongoing costs of running and maintaining the apartment community and its grounds.

PASSIVE INVESTOR

Also known as the Limited Partner, placing one’s capital into an Apartment Syndication that is managed in its entirety by a General Partner.

PREFERRED RETURN

The threshold return that Limited Partners are offered prior to the General Partners receiving payment. This return structure may or may not be used and has the purpose of counterbalancing the risk associated with investing capital into the deal.

PRO-FORMA

The projected budget with itemized line items for the revenue, expenses and returns for the next 12-months and/or the next 5 years.

PRINCIPAL

The original sum lent to the borrower.

PRIVATE PLACEMENT MEMORANDUM (PPM)

A legal document provided to prospective investors when selling securities that states the objectives, risks and terms of an investment.

PROFIT AND LOSS STATEMENT (P&L / T-12)

A document or spreadsheet containing detailed information about the revenue and expenses of an apartment over the last 12 months. Also referred to as a trailing 12-month profit and loss statement, P&L, operating statement, or T-12.

RENT PREMIUM

The increase in rent demanded after performing renovations to the interior and/or exterior of an apartment community.

RENT ROLL

A document or spreadsheet containing detailed information on each of the units at the apartment community, including the unit number, unit type, square footage, tenant name, market rent, actual rent, security deposit amount, move-in date, lease-start date and lease-end dates, and each tenant’s balance.

RENT ON INVESTMENT (ROI)

Also known as Total Return, directly measures the amount of return on a particular investment, relative to its cost. ROI is calculated with the investment return divided by the cost of the investment. The result is expressed as a percentage or a ratio.

SOPHISTICATED INVESTOR

A person who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity but does not meet the Accredited Investor qualifications.

STABILIZED EXPENSE RATION

Measurement of the cost to operate a piece of property, compared to the income brought in by the property. Formula: Dividing a property’s Operating Expense (minus Depreciation) by its gross operating income.

TRAILING 12-MONTHS (T-12 / P&L)

UNDERWRITING

The process in which an underwriter researches and assesses the risk of a potential asset.

Additional terms available at www.investopedia.com or visit our Frequently Asked Questions.