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. 👇

Property & Market Basics

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.

Door (Unit):

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.

NOI

Net Operating Income

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.

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.

Tertiary Market:

Less than 2 million people.

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?

Working Capital:

Funds used for future capital items (rule of thumb= 1 month of rents).

Deal & Transaction Terms

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.

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.

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.

LOI – Letter of Intent:

Non-binding offer to purchase – 1 or 2 pages with key terms.

OM – Offering Memorandum:

Broker document describing the property.

Property Traded for:

Term used to represent what a property sold for.

PSA – Purchase and Sale Agreement:

Contract between the buyer and seller.

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.

Proof of Funds:

Account statements (excluding retirement) showing liquidity to close the deal.

Financing & Loan Terms

Amortization Period:

Number of years it will take you to repay the loan. Typically 20-30 years.

Capital Cost:

Costs can be capitalized over x# of years for tax purposes. Example: replace an AC unit.

Guarantor:

Signs on the loan, but no equity

KP- Key Principal:

Signs on the loan + equity

Leverage:

Using other money such as a loan.

Maintenance Expenses:

Costs are expensed for tax purposes. For example, fix an AC unit.

Recourse vs Non Recourse Loan:

• Recourse – personally liable

• Non-Recourse – not personally liable

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.

ABP- All Bills Paid:

Property pays for all utilities.

RUBS – Ratio Utility Bills System:

Billing back the tenants for utilities.

Risk Fee:

A fee charged to a tenant that has a lower credit score.

Syndication & Investing Structure

JV – Joint Venture:

Sponsoring a deal with one or more other people.

OA – Operating Agreement:

Most deals are created with a LLC governing how the LLC’s business will be operated.

PPM – Private Placement Memorandum:

Private offering used to raise money from investors.

SA – Subscription Agreement

Application by an investor to join a limited partnership (LLC) for real estate investing.

Syndication:

Sponsor raises funds from a group of people.

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.

PFS – Personal Financial Statement:

Has your assets and liabilities; net worth.

Brokers & Representation

Asset Manager:

Manages the property management company. Fee is typically 1.5-2% to the asset manager.

Buyer Broker:

A broker representing the buyer.

Listing Broker:

The broker that has the property listed.

Financial Analysis & Reporting

PROFORMA / Underwriting

Industry term referring to financially analyzing investment real estate.

RR- Rent Roll:

Lists all tenants; their lease amount and lease start/end date.

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.