Thinking of investing in apartment housing? Here are 10 terms you need to know.
Absorption is a method of letting investors know what the demand is for a building or for an entire market. Absorption measures how many units have been leased within a certain period. When you divide available units by the absorbed (leased) units, you will get a property's absorption rate.
Amenities are a property's desirable features and/or facilities used to attract and service tenants. Amenity space devoted to Class A buildings in particular continues to increase. Entertainment spaces, fitness facilities, access to nature, and security measures are examples of amenities tenants find desirable.
The capitalization rate, or cap rate, is a mathematical formula that shows what sort of return investors are likely to get on a commercial real estate transaction. The number is based on how much net income the property is expected to generate divided by the cost of the property. Financing is not included in the calculation.
Cash flow represents the amount of money investors earn or lose each month after all expenses have been paid, including financing payments. Cash flow is determined by subtracting mortgage payments from NOI. Positive cash flow results when there is money left over, and negative cash flow results when there is no money left over after subtracting mortgage payments from NOI.
Class (A, B, C, D)
Commercial real estate buildings are graded to help designate their worth, with Class A being the newest or more luxurious buildings, through to Class D, representing a property needing significant improvement. Some investors seek to buy a "value add" property in an effort to turn a lower-graded property into a higher-graded property through renovations or upgrades.
Commercial real estate loans differ from single-family loans. Commercial loans tend to be much larger than residential loans, so they can be more complex. Commercial loans can be obtained from banks or private lenders such as Greystone & Co., Inc. (“Greystone")*. Greystone is a national leader in the origination of FHA-insured commercial mortgage loans, Fannie Mae and Freddie Mac multifamily mortgage loans, as well as a provider of bridge and mezzanine financing – all useful in the acquisition, refinance or construction of a multifamily property.
Environmental and Engineering Due Diligence
Environmental and engineering liabilities can cost millions of dollars to rectify, so investors go through a formal process called due diligence to assess real estate for potential environmental and engineering hazards such as groundwater contamination and inferior design.
Loan-to-value, or LTV, is the ratio lenders use to analyze risk, which determines the amount of financing that can be obtained on a property. It's calculated by dividing the mortgage amount by the property's value.
Multifamily properties, also called multidwelling units or MDUs, are buildings with more than one unit. Apartment buildings, duplexes, triplexes, fourplexes, townhouses, and condominiums are all multifamily dwellings.
Net operating income, or NOI, is the total income received from a rental property, less operating expenses. Financing is not included in the calculation for NOI.