MULTIFAMILY INVESTING TERMINOLOGY
Are you a Multifamily Investor or wanting to start buying Apartment Buildings?
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.
Number of years it will take you to repay the loan. Typically 20-30 years.
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.
A broker representing the buyer.
Costs can be capitalized over x# or years for tax purposes. Example: replace an AC unit.
A cap rate measures a property’s rate of return for a single year without taking into account debt on the asset.
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.
Disposing or selling of a property.
Industry term used instead of Unit.
This is the % that is not being collected against the market rents. Includes vacancy, bad debt/non-payment, actual rents vs. market rents.
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.
Key Principal – Signs on the loan+ equity
Guarantor – Signs on the loan, but no equity
Using other money such as a loan.
The broker that has the property listed.
LOI – Letter of Intent:
Non-binding offer to purchase – 1 or 2 pages with key terms.
Costs are expensed for tax purposes. For example, fix an AC unit.
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.
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.
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.
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?
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
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.
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.
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.
Sponsor raises funds from a group of people.
Trailing 12 P&L (Profit & Loss).
Trailing 3 P&L (Profit & Loss).
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.
Less than 2 million people.
Funds used for future capital items (rule of thumb= 1 month of rents).
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.