REAL ESTATE FINANCIAL CONCEPTS FOR STARTUP FOUNDERS
1.- Capitalization Rate
Metric to assess potential return on investment property. Calculated by dividing the property’s NOI by its current market value or purchase price.
2.- Net Operating Income (NOI)
Total income from the property after operating expenses but before mortgage payments, capital expenditures, and taxes.
3.- Cash Flow
Amount of cash generated after accounting for all expenses including mortgage payments. Positive cash flow is vital.
4.- Gross Rent Multiplier (GRM)
To value income-producing properties by comparing price of the property to its gross rental income. Doesn’t account expenses - less comprehensive than cap rate but quicker for initial assessments.
5.- Debt Service Coverage Ratio (DSCR)
Measures cash flow available to pay debt. Calculated by dividing NOI by annual debt service (mortgage payments).
6.- Leverage
Using borrowed capital for real estate investment. Amplify returns but increases risk if property values decline or interest rates rise.
7.- Return on Investment (ROI)
Assesses the efficiency of an investment in real estate. Complex due to appreciation, rental income, and tax benefits.
8.- Amortization
Process of paying off debt over time through regular payments. How much of each payment goes toward interest vs principal.
9.- Equity
Portion of the property you own outright. Increases as you pay down the mortgage or as the property appreciates in value. Equity used for further investment or as collateral.
10.- Loan-to-Value Ratio (LTV)
Used by lenders to assess risk of a mortgage loan. Ratio of the loan amount to the appraised value or purchase price of the property. Higher LTV - higher risk for lenders.
11.- Depreciation
For tax purposes, owners can deduct the cost of the building (not land) over its useful life, reducing taxable income.
12.- Exit Strategy
Like selling, refinancing, or holding long-term to influence how you finance or manage your investment.
13.- Operating Expenses
Understanding of all costs associated with owning and managing property, from maintenance to property management fees.
14.- Vacancy Rates
Anticipating and budgeting for vacancies is crucial for cash flow management.
15.- Interest Rate Risk
Variable rate mortgages can lead to increased payments if rates rise, affecting cash flow and investment returns.
16.- 1031 Exchange
Allows investors to defer capital gains taxes by selling a property and reinvesting the proceeds into a like-kind property. For growth.
Author: D.B.A. Jaime B
