Real Estate Vocabulary | REIal Talk | EP. 52

Hi, guys. Welcome to another episode on Real Talks. Today I am here with CJ. We are on episode number 54. And today we are going to be doing a little real estate vocabulary lesson just for over or just over some of our some basic terms. I'm also going to actually be learning a couple that I don't know. So I'm excited. If you watched our vlog last week, you'll know that we went over cap rate, cash on cash, and cash flow, what those are. So go ahead and start it off with just a quick recap on those three and then we'll dive into some other words here. So do you just want to do a quick recap on that, C.J.

Sure. So you want to start out with the cap rate.

Perfect. Yeah.

Okay. So cap rate is the net operating income over or the net income over the purchase price of a property. So the net income is the gross revenue minus the expenses, except for the mortgage and then over the purchase price. So that's going to get you your cap rate.

Okay, perfect. Oh, sorry.

And then. Nope. And then next, I believe was cash on cash. Yep. So cash on cash return is the return you're going to see based off the money that you have invested. So what is your rate of return? So all of the cash that you receive in a year over the cash that you invested for that year will get you your cash on cash return.

Okay. I like the way you explained that. I said that in the vlog. I don't know why, but that just like makes the most sense to me the way that you.

I try to think of it simply. Yeah. And then cash flow is what we care about here at Turnkey Ohio. So it's the money that gets to go in your pocket at the end of the month once all of the expenses are paid, including your mortgage. So that obviously depends if it's an all cash purchase or you're getting a loan on it. And a lot of variables what that cash flow can look month to month and it varies because they're unexpected expenses.

Yeah, absolutely. That's a good point. Good point.

Yeah.

All right, so we did that quick little recap. One that we didn't touch on in the vlog was appreciation. What exactly is that?

Yeah, appreciation is basically the property increasing in value and what its perceived value is through the, through the years. You've heard probably this thrown around a ton these last two years because everywhere has seen significant appreciation. Typically here in the Midwest, it's a lower percentage. We like to say 1 or 2%, but we've been seeing double digit appreciation. And that is significant because when you're getting a loan on a property, you as the investor get to capture all of that appreciation as your own. So it gets really powerful when that occurs.

Yeah, absolutely. I did a quick market analysis at the end of the year and based on the research I found, I think I saw that for Dayton it was like a 21% increase in 2021. It's crazy. Yeah, it's crazy. These two kind of tie together. What is equity?

Yeah, equity. So that appreciation would add to your equity of the property, but it's basically the amount of the property that is your own ownership. If you were to sell, what, what amount you would capture. So typically when you are purchasing a home, you may be putting 20% down if it's an investment property. And so that 20% is your equity. Plus maybe that appraisal came in over what you're actually paying for the property by $10,000. So you would add that 20% and that $10,000 and that would be your equity or how much you own of that property thus far. And each month when you're paying your mortgage payment, you're paying down a lot of interest, but also a little principal as well, which is adding to your equity every month.

Perfect. Yeah. I didn't know about the appraisal part and adding that additional one. I didn't know that. So. Told you guys, I was learning. I'm learning as well. So now.

Oh.

Were you gonna say something?

No, you're good. That's just why everyone is always chasing that. Everyone's trying to catch that great property right off market, which is a lot of what we do here at Turnkey Ohio, because we're gonna hopefully capture additional equity from once we finish the rehab and appraises at a higher value.

Yeah, absolutely. So now what is internal rate of return?

Yeah, so the internal rate of return is basically through the years. What is the projected rate of return that the investor is going to see? So this is important because maybe in that first year the return is relatively minor because you're going through a large rehab of the property or getting it stabilized. But what is the projected return that that investor can see through a number of years, if that makes sense. There's a, there's a more complex calculation for it, but that's in essence what, what an IRR or internal rate of return is getting to.

Got it. Perfect. Yeah, that was another great explanation. I was actually picturing almost like a timeline in my head up to like 30 years on what that would be look like. Perfect.

Yeah. It's the net present value of that. Do what I was just saying, it's the net present value of that. Yep, exactly.

Awesome. So now a leasing fee. What is that? And kind of how does that come into play?

Yeah. So a leasing fee for a lot of property management companies, they will charge a leasing fee. A lot will do a single month of rent for getting basically screening the tenants, marketing the property, getting, doing showings, everything that goes into placing that resident or tenant into the property. A property management company will charge a leasing fee or in most cases a month, a month's rent for those services. Now, one of the unique things about ipm, our property management company, is we actually are not charging a leasing fee. We are doing a renewal fee. So we will not charge to place another tenant into that property. We are, they're just going to charge, I believe it's $250 each year that they renew with the property, which I really like because it's aligning incentives. Right. We both IPM and us as the investor want to keep a resident in the property as long as possible because it's going to reduce our turnover. Vacancy all those capex costs that come when you need to have when you have an empty unit, plus not having to have it additional month leasing fee. Right. It just really, it stings.

Yeah, definitely, absolutely agree. We try to keep those residents in place for as long as we can. Some, you know, sometimes you can't. Life happens, you got to pick up, move somewhere or something. But definitely keep them happy and keep them in there as long as we can. Absolutely. All right, so now what is leverage return?

A leverage return? Yeah, so it's the return that you're going to get with leverage. So there's all sorts of loan products out there, but you know, you can buy a FHA, you know, single family home to up to a 4 Plex and only have to put 3.5% down. And that can be advantageous with how low the interest rates have been for borrowing capital with a mortgage. So the leverage return is going to be what is your return that you're going to yield with whatever amount of leverage you have in place? That could be 80% leverage because you put 20% down, but it's the return that you're going to yield from that leverage.

Okay, got it. See, that was a new one. I did not know that one. And I'm actually in the process of buying my first house.

Congrats, Good luck. It's quite the process.

Yes, it Is yes, we're excited though. So we're excited. But that is good to know. I did not know that one. Now you just mentioned single family home and that's actually the next one on our list. And you may see an abbreviation on this one which is sfh. What exactly is a single family home?

Yeah, so single family home really is just what a typical property is. Right. The American dream is buying a single family home. Or you know, for us, some people will also refer to them as SFRs or single family rentals versus single family homes. It's the same thing but versus a duplex, triplex or a quadplex which are small multi units and then once you get it to five plus units those are deemed commercial properties or multifamily. But yeah, single family is just a single family residence with one, one, one door.

Perfect. And then you answered the next one too on what is multifamily. So you went into that. So that is perfect.

Yeah.

Now we, you kind of said, you know the term rental which the next word on here we have is turnkey. Those correlate together. So what exactly is turnkey?

Yeah, Turnkey is a property that is ready to go and start making money from day one. So we work with a lot of busy professionals here at Turnkey Ohio out and they just want something that is ready to go that they can put their deposit or the 20% down and it will start making money from day one of ownership. So turnkey is going to help a purchaser with the inspection, the appraisal, getting the loan, getting the insurance, having a property management set in place and then also helping them get tenants or residents into the property to get it rented. So they're going to basically do all of the background, you know, repairs, anything that is needed for the property to get it in running order and then manage it, help help manage it thereafter with the property management as well.

Perfect. So really the investor is very hands off for turnkey properties.

Yeah, yeah. I like to think of it as a one stop shop as well. Right. It's a mentor or someone there to guide you through the home buying experience. As you just said, it's quite the process and it's nice to have someone to kind of say here's the next step or the next thing that we need to. Oh, we need to get the appraisal scheduled or we need to find an inspector, whatever that may be.

Yeah, absolutely. And I believe Tiffany and Carla, they do a pretty great, they do a great job with that.

So Tiffany is incredible.

Good way to explain it. I like that. Okay, so now what is vacancy provision?

Yeah, vacancy provision is something I haven't heard as much. I think it's typically a term for commercial, but it's really, to my understanding, for insurance purposes, if a property is vacant for a certain amount of time, it cannot be covered. Or if something, you know, let's say there was a break in, but it's been vacant for a certain period of time, insurance may not cover. Cover the damages that were incurred from that break in. Unless. I don't know if you have a better understanding, but I haven' Use that as much.

Yeah, that was a new one for me as well. May have to get with Chris, our senior property manager and ask him on that one. May have to do that one.

Yeah.

Okay, so now what is a short term rental then versus, you know, like a long term rental?

Yeah, so short term rentals have really been popularized these last five, 10 years with Airbnb, but is something that, you know, is rented under a year, basically. Right. A traditional rental or a long term rental is someone who is renting a property and signing a year lease agreement. Whereas a short term rental, which was your question, is something that could be rented just for a night or maybe a couple days. Right. A weekend.

Got it. Perfect.

And typically you're able to earn a lot more capital with a short term rental. Right. Because you can charge higher rates for a nightly rate, but it's a lot more active from the management perspective. Right. There's a lot more communication back and forth.

Yeah, that's a good point. The active point. We're actually on our next episode, I believe we're actually going to be talking about the differences between active, passive and kind of like an in between investor on that one. So if you're wondering what those are, you have to come back next week to hear about those and kind of see what different options you have for those kind of three different options opportunities you have there. But until then, the next thing on the list is hard money. What is hard money?

Yeah, a hard money lender. So as you may be aware, you're going through the bank process and getting a mortgage. They want to know your entire financial life. It's not just your credit score, it's your past paychecks, your pay stubs. They look at all of your income, all of your expenses, all of your outstanding debt and figure out how much they are willing to lend to you and what your risk is and that'll be reflected in your interest rate. But a hard money lender is a third party Or a private investor typically is very involved with real estate and they will lend capital at typically a much higher interest rate than a bank will. Right. But it's great for people who are doing fix and flips. They will maybe use hard money. We use private money or hard money to fund our purchases and rehabs. And because it's a very short, finite amount of time that we're going to be utilizing that capital, but it allows us not to have as many rules and regulations as a mortgage or a bank may require.

That was going to be my question on what is the biggest difference between the two. And you just answered that with the, you know, like the regulation standpoint. Perfect.

Yeah. And I think it's also quickness. Right. A hard money lender may be able to fund a deal within a couple days, whereas a bank is typically going to need at least a month in order to go through all of that background check and just the processes. Bureaucracy.

Yeah, absolutely. Perfect. All right, we have two left. The second to last one is net operating income, which also you might see abbreviated as noi.

Yeah. So the net operating income is basically very simply, it's all of the revenue or rent that you are collecting from a property minus all of the expenses except for the mortgage. So it's going to basically be what are you making on this property in a year time span. Right. Typically when people are talking about noi, they're referring to it in a 12 month or what they expected NOI would be for a property.

Okay.

But this is a way that all real estate investors kind of measure the value of a property. Right. How much of a return am I going to expect? Or what is the income I'm going to have after all of my expenses at the end of the year? And that determines what the value that someone's willing to pay for that property.

Perfect. I'm glad you added at a year glance because I didn't know that. I was thinking in my head at the end of every month, but at a year glance makes a lot more sense, I think so. Perfect.

Yeah.

All right.

I think any of our investors would. Oh, sorry. I think there's a little lag there.

No, that's okay.

I was just going to say, yeah, net operating income is important to look at it from a year standpoint because the maintenance and capex or vacancy even can really fluctuate month to month. Right. So you have to look at it at a longer time span or horizon.

And in that noi are there predictions of, of repairs needing done or vacancy if something happened. Is that predicted in that?

Yeah. So people will depends who you're talking to. Right. If it's the seller of a property or a buyer. Right. How they're going to, you know, configure that. But a lot will look at like the trailing 12. Right. So the last 12 months, what have the capex repairs been in the last 12 months or what has the different utilities been? Right. Because that's going to give them a good estimate what to forecast for the the next 12 months.

Okay. Yeah, perfect. That answered my question. All right. The last one that we have today is what is debt to income ratio?

Yeah. So this is one of those things that the banks care about a lot. When they are going to be looking to approve you for a loan they want to make sure understand how much debt that you currently have. So this could be credit card, car, maybe another home. Any type of student loans is a big one. Any loans or debt service that you are responsible for on a month to month or yearly basis versus the amount of income that you are generating on a monthly bi weekly basis basically to determine if how much loan you can or how much debt you can handle or take on with with this property. Right. And it's an interesting thing with our, you know, rental properties because you are going to hopefully be able to pay for the mortgage with the rent that you're collecting. But they, they still want to make sure that you're not becoming over leveraged or carrying too much debt.

Yeah, I know my significant other and I we've been you know talking about buying a home probably since fall. You knew we, you know, we knew that we wanted to look in the early spring and get started on it. Well, he has so very badly been wanting to buy a new car and I was like no, no, I was like please wait till after we buy a house because that is going to affect our debt to income ratio and the lender, whoever we use is going to look at it is going to be a red flag. I was like just wait till after we buy a house. So he wasn't, he was a little upset at first but he understands why. So if you have ever seen I know it's become like a popular thing video trend I guess on TikTok of real estate agents and realtors talking about how they'll see someone that is interested in buying a house and then they pull up to the closing or something and then right before they pull in like a brand new car or something or something funny. So if you ever saw those, that is why that video. If you saw it, it never made sense before. Debt to income ratio is why now. It should make sense. You see it in the future.

Exactly. And that's why people go to a hard money lender, right? Because they may have too much debt or just there may be something in their past or they may not have a traditional W2 job. For the last two, there's a lot of restrictions that a bank can have and force people to get funding via different methods, such as hard money.

Yeah, that's a good point too. Excellent. All right, well, that's all that we have today. If you guys are interested in hearing any more vocab words or real estate terms, put it in the comments below or email us and we'll be glad to go over them with you guys or maybe even bring you on or something. We would love to hear from you guys. That's all that I have today. Cj, do you want to add anything or do you have anything to add?

No, I think just continue to engage with content and better understand these financial terms is just going to help you in the long run.

Yeah, absolutely. Absolutely. And like I said, I'm learning along with you guys. So no shame in that and I love it. We always like to end these with.

Invest smart, live happy.

Thanks, guys.

Bye.

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