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REAL ESTATE INVESTMENT ANALYSIS - GLOSSARY

- Potential Gross Income ( PGI )  
Potential Gross Income is the total annual income that a property produces at its 100% potential, before any expense is deducted or loss incurred.
- Effective Gross Income ( EGI )  
Effective Gross Income = (Potential Gross Income) - (Vacancy & Collection Loss) + (Other Income)
- Net Operating Income ( NOI )  
The Net Operating Income is obtained by subtracting total operating expenses (as well as any other additional expenses involved in the operation of the property) from the Effective Gross Income "EGI".
- Operating Expenses  
Operating Expenses are all expenses necessary to operate and maintain an income property.
- Fixed Operating Expenses  
Expenses that remain "fixed" regardless of the operation of the property. Ex: Real Estate Taxes, Insurance.
- Variable Operating Expenses  
Expenses that vary depending on the operation of the property. Ex: Maintenance, Utilities, Management.
- Reserves for Replacement  
A portion of the income set aside to replace components of the property at the end of their useful lives. Reserves for replacement expenses are usually not a cash expense.
- Depreciation  
For appraisal purposes, depreciation is described as a loss of value for any reason.
- Capitalization Rate ( Cap. Rate ) / Direct Capitalization  
The Capitalization Rate is used to analyze the relationship between the Estimated Value of a property and the Estimated Net Operating Income "NOI".  The Capitalization Rate "Cap. Rate" is equal to the "NOI" divided by the "Property Value";  for example:  Value=100,000, NOI=10,000, therefore; Cap.Rate= 10,000/100,000= 10%.    In Direct Capitalization you divide the "NOI" by an overall capitalization rate.
- Lender's IRR ( Internal Rate of Return)  
The Lender's IRR (Internal Rate of Return) is based on the initial loan amount (adjusted for any "points"), Total annual payments, and loan payoff (adjusted for "lender's participation" and pre-payments penalties).   The Lender's IRR will give you an uniform estimate of how much a loan is costing you.   Because the Lender's IRR is adjusted for discount points, participation, and pre-payments; it makes it easier to compare loan options.
- Loan to Value Ratio  
The Loan to Value Ratio (L/V) is the relationship between the amount borrowed and the appraised value (or purchase price) of a property. The L/V Rario is used to measure the financial risk associated with lending and borrowing money.
- Debt Service Coverage Ratio  
The Debt Service Coverage Ratio is used to measure the amount of cash flow remaining after the annual debt service has been paid. The higher the D.C. Ratio is, the more likely it is that the investor will have adequate income to cover the debt service.
- Operating Expenses Ratio  
The Operating Expense Ratio is used to determine the percentage of effective gross income that is consumated by operating expenses. The O.E. Ratio is often used to judge how likely an investor will be able to make mortgage payments.
- Cash Breakeven Ratio  
The Cash Breakeven Ratio provides lenders and investors with a measure of all cash charges against potential gross income. The lower the C.B. Ratio the greater the cash return to the investor.
- Margin of Safety  
The Margin of Safety between cash receipts and cash disbursements is the difference between 1.00 and the cash breakeven ratio.
- Investor's Pre-tax Equity Dividend Ratio ( EDR )  
The Pre-Tax Equity Dividend Rate (also called "Cash an Cash" return) relates the amount of before-tax cash remaining after debt service to the investor's equity.    The Pre-Tax EDR is an important and widely used ratio in real estate investment analysis because it is an indication of the return to an investor on his or her cash investment in a project.
- Investor's After-tax Equity Dividend Ratio ( EDR )  
The After-Tax Equity Dividend Rate relates the amount of after-tax cash remaining after debt service to the investor's equity.
- Yield to Investor  
The Yield To Investor is calculated as the relationship between the Net Operating Income (NOI) minus Interest Expense and the Amount of Equity. The Yield can be used to calculate the effect of leverage.
 
"The best investment is in the tools of one's own trade"
 Benjamin Franklin (1706 - 1790) US statesman, diplomat, inventor, printer

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