Multifamily Terms
& Definitions
Are you a Multifamily Investor or wanting to start buying
apartment buildings?
Here are some helpful terms and definitions related to
Multifamily Investing.
There may not be a test, but learning the multifamily lingo is always a good idea.
Here are some helpful terms and definitions related to
Multifamily Investing.
ABP- All Bills Paid:
Property pays for all utilities.
ALURA – A Land Use Restrictions Agreement:
Seller bought the property and received tax credits and now there is a limit on the amount of $ a tenant can make. You will have a harder time selling this type of property.
Amortization Period:
Number of years it will take you to repay the loan. Typically 20-30 years.
Asset Manager:
Manages the property management company. Fee is typically 1.5-2% to the asset manager.
Best & Final:
Process whereby a seller down-selects buyers to a smaller group and asks them to submit their best and final offer.
BOV – Broker Opinion of Value:
Broker provides this to a seller when the broker is trying to get the listing to sell the property.
Buyer Broker:
A broker representing the buyer.
Capital Cost:
Costs can be capitalized over x# of years for tax purposes. Example: replace an AC unit.
Cap Rate:
A cap rate measures a property’s rate of return for a single year without taking into account debt on the asset.
Cash Flow:
Buy for cash flow and pay market price.
DD – Due Diligence:
Inspecting the property’s exterior and interior to determine the condition and deferred maintenance (required maintenance that the current seller has not performed); also includes lease audit.
Deferred Maintenance (DM):
Required maintenance that has not been performed.
Disposition:
Disposing or selling of a property.
Door:
Industry term used instead of Unit.
Economic Vacancy:
This is the % that is not being collected against the market rents. Includes vacancy, bad debt/non-payment, actual rents vs. market rents.
Guarantor:
Signs on the loan, but no equity
Hard Money:
Money that the seller keeps if you walk away from a deal. Hard money can be at time of contract, after due diligence, or any other time agreed upon.
JV – Joint Venture:
Sponsoring a deal with one or more other people.
KP- Key Principal:
Signs on the loan+ equity
Leverage:
Using other money such as a loan.
Listing Broker:
The broker that has the property listed.
LOI – Letter of Intent:
Non-binding offer to purchase – 1 or 2 pages with key terms.
Maintenance Expenses:
Costs are expensed for tax purposes. For example, fix an AC unit.
NOi:
Net Operating Income
OA – Operating Agreement:
Most deals are created with a LLC governing how the LLC’s business will be operated.
OM – Offering Memorandum:
Broker document describing the property.
PFS – Personal Financial Statement:
Has your assets and liabilities; net worth.
PPM – Private Placement Memorandum:
Private offering used to raise money from investors.
Primary Market:
5 million or more people, but also need to look at the investment activity. For example, Detroit has more than 5 million people, but low investment so it is considered a secondary market.
Principal Paydown:
We call this our “personal piggy bank”. Every month when your tenants pay their rent, they pay off a portion of any financing used to purchase the property creating additional equity in the property as they pay down your loan.
Principal Protection:
Multifamily Investments are secured by their cash flow and also hazard insurance that even covers the income the properties generate if disaster hits. Are your other investments secured?
PROFORMA/Underwriting:
Industry term referring to financially analyzing investment real estate.
Proof of Funds:
Account statements (excluding retirement) showing liquidity to close the deal.
Property Traded for:
Term used to represent what a property sold for.
PSA – Purchase and Sale Agreement:
Contract between the buyer and seller.
Recourse vs Non Recourse Loan:
- Recourse – personally liable
- Non-Recourse – not personally liable
Re-trade:
After due diligence, the buyer goes back to the seller asking for items to be fixed and/ or a credit to fix deferred maintenance items.
Reversion Cap Rate:
Cap rate you think at time of sale for the property.
RR- Rent Roll:
Lists all tenants; their lease amount and lease start/end date.
Risk Fee:
A fee charged to a tenant that has a lower credit score.
RUBS – Ratio Utility Bills System:
Billing back the tenants for utilities.
SA – Subscription Agreement:
Application by an investor to join a limited partnership (LLC) for real estate investing
Secondary Market:
2-5 million people, but also need to look at investment activity. For example, Austin has less than 2 million people, but is considered secondary due to investment activity.
Syndication:
Sponsor raises funds from a group of people.
T l2:
Trailing 12 P&L (Profit & Loss).
T 3:
Trailing 3 P&L (Profit & Loss).
Tax Benefits:
Mutlifamily real estate has some huge tax advantages that create “tax-advantaged income”. Through the use of depreciation, 1031 exchanges, and self-directed IRAs, you can have some of the most favorable income tax treatments of any asset class.
Tertiary Market:
Less than 2 million people.
Working Capital:
Funds used for future capital items (rule of thumb= 1 month of rents).
Yield Maintenance:
A prepayment penalty that, in the event the borrower pays off a loan before maturity, allows the lender to attain the same yield as if the borrower had made all scheduled mortgage payments until maturity.