Investing With Confidence: Real Estate Terms You Need to Know
Whether you are new to real estate investment or looking to expand your existing knowledge, gaining a firm grasp of key real estate terms is an excellent starting point. Real estate is an asset class with its own terminology and concepts. Familiarizing oneself empowers individuals to ask well-informed questions, leading to greater involvement in their investment strategy.
As you embark on your journey towards financial literacy, here are five essential terms with which to familiarize yourself:
- Appraisal
- Debt Service Coverage Ratio (DSCR)
- Net Operating Income (NOI)
- Assets Under Management (AUM)
- Occupancy Rate
1. What Is the Importance of Property Appraisals in Real Estate Investment?
An “appraisal” is an important real estate term to understand when investing. Ideally, it represents an impartial property evaluation executed by a third-party accredited real estate appraiser. To estimate a property’s worth, appraisers employ various valuation methodologies, such as examining similar properties’ current market value.
A property appraisal serves as the cornerstone for determining the property’s actual value, ensuring its price accurately mirrors its condition, age, location, and distinctive features. Appraisals carry substantial influence across numerous facets of real estate ownership.
Appraising a Real Estate Investment Trust’s (REIT’s) assets becomes instrumental in allowing investors to ascertain the overall health and intrinsic value of the REIT’s extensive portfolio. Thus, understanding the nuances of appraisals is a crucial skill for any investor venturing into the dynamic world of real estate.
➜ Investors can view the latest third-party appraisals of each asset in Equiton’s Annual and Quarterly Reports for the Apartment Fund.
2. What Is Debt Service Coverage Ratio?
The debt service coverage ratio (DSCR) is a critical metric for investors because it shows whether a company has enough operating income to repay its debt obligations. The ratio quantifies the amount of cash generated by the company for each dollar of principal and interest owed.
The DSCR is calculated by dividing net operating income (NOI) by debt obligations. A ratio above one indicates that the company is more creditworthy and is generating sufficient funds to service its debt obligations.
For investors, a robust DSCR is indicative of a lower risk associated with a company’s debt management, making it an essential metric to consider when evaluating potential investment opportunities. It provides valuable information about the financial health and stability of an investment, assisting investors in making informed decisions.
➜ Equiton’s debt service coverage ratio can be found in our Annual Report and Quarterly Reports for the Apartment Fund, and the Annual Report for the Income and Development Fund.
3. What Does Net Operating Income Mean?
Are you familiar with the real estate term “net operating income (NOI)”?
Understanding NOI is essential for investors because it is a fundamental metric in assessing the financial performance and potential profitability of an income-generating property. It serves as a crucial indicator of management’s operational efficiency, measures investor income returns, and plays a pivotal role in determining a property’s market value.
NOI is calculated by subtracting the property’s operating expenses from the revenue generated within a specific time frame.
Net Operating Income = Revenue – Expenses
Examples of revenue streams:
- Rental income
- Non-rent items (parking fees, laundry machines, lockers, etc.)
Examples of expenses:
- Realty taxes
- Utilities
Income taxes, debt payments, depreciation, amortization, capital expenditures, and market value adjustments are not factored into NOI.
➜ At Equiton, we aim to increase NOI through strategic management and identifying value-creation opportunities within our asset portfolio. Investors can view our operational and financial results, including total operating revenue and NOI, in our Annual Report and Quarterly Reports for the Apartment Fund and the Annual Report for the Income and Development Fund.
4. What Is Assets Under Management and Why Is This Important?
Another key real estate term that is beneficial to understand when investing in real estate is “Assets Under Management (AUM)”.
AUM is the total market value of a portfolio of investments. Often used to indicate size or amount, AUM can be used in multiple ways. It can refer to the total amount of assets managed for all clients, or can refer to the assets managed in a specific investment vehicle or fund. Equiton typically refers to AUM by the total amount of assets managed for all clients.
An increasing AUM may indicate positive fund performance, reflecting growing asset values. When new investors are attracted to the fund, investing additional capital, or when the fund’s assets undergo efficiency improvements that reduce expenses, these elements collectively contribute to AUM growth, ultimately enhancing investor returns.
➜ Equiton’s AUM for the Apartment Fund can be found in our Fund Fact Sheets, which are updated monthly, as well as in the Quarterly and Annual Reports. The AUM for the Income and Development Fund is also listed in our Fund Fact Sheet and Annual Report.
5. What Is Occupancy Rate?
Let’s gain an understanding of the real estate term, “occupancy rate”.
Occupancy rate is an important metric for real estate investors as it represents the proportion of rented units in large-scale real estate assets, such as multi-residential apartment buildings, in relation to the total unit count. This metric is significant as it offers insights into anticipated cash flows. High occupancy rates can provide confidence for investors, indicating strong demand for the property and a higher level of investment security.
How to calculate the occupancy rate:
The percentage is calculated by taking the total number of occupied units and dividing it by the total number of units within the property.
For example, if an apartment building contains 50 units and 45 units have renters, then the occupancy rate is 90%.
➜ To ensure our properties maintain the highest occupancy rate possible, Equiton actively manages all properties included in our funds, giving us the advantage of promptly filling any vacancies. Equiton’s occupancy rates can be found in our Annual Report and Quarterly Reports for the Apartment Fund, and the Annual Report for the Income and Development Fund.
A higher occupancy rate means your investment is better protected because it’s a sought-after building.
Understanding Real Estate Terms for Smarter Investing in Real Estate
Now that you are better acquainted with key real estate terms, you can continue your investment journey with greater assurance and a firmer financial footing. At Equiton, our team of industry professionals guide investors at any stage, whether you are new to real estate investing or already well into your journey. Equiton simplifies real estate investing, making it accessible and straightforward.
Contact us today to explore Equiton’s investment opportunities and take steps toward growing your wealth through private equity.
