What are all these real estate acronyms, and is it really all about the numbers?

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According to Investopedia, the definition of investing is “The act of committing money or capital to an endeavor (a business, project, real estate, etc.) with the expectation of obtaining an additional income or profit.” So by definition, yes it most certainly is about the numbers.

I want to make you know that the numbers are not the only consideration in investing. If the numbers don’t work it is not investing. It is speculating, charity, or something else, but the numbers are only one piece of your investing puzzle. The image the puzzle becomes will be different for every investor because it is comprised of where they have been, where they are going, their “why,” the amount of time they have, access to capital, their particular talents, and a million other things that are not necessarily a conscious part of our choices, but that inform them just the same.

I love residential real estate because I love investing in people. I get excited every time I meet with a new tenant to sign the lease and provide them keys to their new home. They are happy and glowing at a new home that is a step up for them. It is a symbol of their lives moving in the direction they want them going. I love to feel like I’m a silent partner in their movement towards their ultimate goals and it is truly awesome. To a lesser extent, I know that I continue to contribute when I pay the handyman, plumber, roofer, etc. I have a direct, positive impact on the world through investing. Would I do this if the numbers didn’t work? No. But I picked this type of investment because of the perk of helping people in a way I can see. Many other investments do not align with what I want my life to mean as I grow.

Here some of the common terms that are used frequently in the real estate investing world and give you the formula to calculate them:

  • Cash Flow (Net Spendable Cash) = Cash in – Cash out
  • Appreciation = Future Resale Price – Original Purchase Price
  • Amortization = Total loan payments – Interest paid (this is usually expressed in number of years to pay off, such as 15- or 30-year amortization)
  • Annual Debt Service (ADS) = Total loan payment amount for the year
  • Operating Expenses = Insurance + management fees + utilities + taxes + repairs
  • Cash on Cash Return = Dollar Income / Total Dollar Investment (Down payment + Repairs and Make Ready)
  • Return on Investment (ROI) = (Gain From Investment – (Total Cost of Investment (Loan + Down payment + Repairs)) / Total Cost of Investment
  • Net Operating Income (NOI) = Income – Operating Expenses (such as. NOT loan service, capital expenses, or appreciation)
  • Taxable Income = NOI – Mortgage Interest – Depreciation
  • Gross Rent Multiplier (GRM) = Selling Price / Gross Rent
  • Gross Scheduled Income (GSI) = the total annual value of rent for all units in the property
  • Vacancy = a % of GSI as a loss due to vacancy (3-10%)
  • Gross Operating Income (GOI) or Effective Gross Income (EGI) = GSI – Vacancy
  • Annual Property Operating Data (APOD) is a yearly income and expense statement