Four monetary benefits of investing
o Cash flow
o Price appreciation
o Principle/mortgage reduction
o Tax shelter
cash flow
The annual gross income produced by a real estate investment minus all expenses is called
return on equity (cash on cash return)
The annual cash flow divided by the cash down payment (equity)
total return on equity
The annual return on yield based on the four monetary benefits to investing in real estate is called total return also known as
tax shelter
The fact that most expenses related to real estate investment ownership can be used to offset income from that investment referred to as a
tax deductible expense examples
hazard insurance, property taxes, maintenance, management fees, and mortgage interest
active investor
is one who actively participates in the management of the investment
passive investor
can only use losses to offset income from other passive investments
leverage
the impact that borrowed funds have on an investment return is called
appraisal
is the act of estimating real property values
market value
includes the most probable price which a property should bring in a competitive and open market
appraiser's responsibilities
oPlace themselves in the shoes of a typical buyer
oInvestigate all factors affecting value both good and bad
oTo not be an advocate of the property being appraised
oTo act diligently and ethically with full disclosure
determining value: cost approach
Estimating the construction cost of a building and any site improvements, deducting accrued depreciation, then adding the site value
determining value: sales comparison approach
Involves finding at least three recent sales of properties comparable to the subject being appraised, and then adjusting the sales for inferior and superior factors in an adjustment grid
determining value: income approach
Involves estimating a gross monthly income for the subject property based on comparable rentals, then multiplying that income by a gross rent multiplier (GRM)
functional depreciation
A loss in value due to an inadequacy or super adequacy of a property is called
external depreciation
A loss in value due to factors outside of the property's boundaries is called
deferred maintenance
A loss in value due to wear and tear of a property (worn carpet, paint) is considered to be physical depreciation and labeled
capitalization
The process of converting income to a value estimate is called
direct capitalization
is a method used to convert an estimate of net operating income into a value indication
capitalization rate
The conversion is accomplished by dividing the income estimate by an appropriate
band of investments method
is a way of "building" a rate, and is based on the theory that most investments are comprised of debt (the mortgage loan) and equity (down payment)
reversion
the value of the investment at the end of the holding period
holding period
the length of time in years that the investment is expected to be owned
discounting
benefits received in the future are worth less that the same benefits received today because of opportunity cost
discount rate
the rate that is applied to the annual cash flows in order to convert them to present value. Also known as the internal rate of return (IRR)
ad valorem taxes
property taxes levied according to property assessed value are called
annual property taxes: appropriation
Each tax unit prepares a budget; the process is called
annual property taxes: assessment
The value of each property in the county is determined by mass appraisal. The process is called
tax rollback
If a property's use is changed from agricultural (with a special ag exemption) to a higher, more valuable use, this can result in a
tax lien
In texas, liens that are superior to all other liens are
leasehold estate
A lease is a legal contract and a conveyance of a right called a
leasehold estates: estate for years
A lease that is for a definite period of time and has no automatic renewal at the end of lease is called an
leasehold estates: periodic estate
A lease that is for a definite period of time and does have an automatic renewal clause at the end of lease that leads to a month to month lease is called a
leasehold estates: tenancy of sufferance
A holdover tenancy without the lessor's consent is called a
gross lease
A lease whereby the tenant pays rent and utilities only is called a
net lease
A lease whereby the tenant pays rent and utilities plus either property taxes or hazard insurance or maintenance of the unit is called a
triple net lease
A lease whereby the tenant pays rent, utilities, taxes, insurance and maintenance is called a
graduation lease
A lease that calls for slight increases in rent each period (usually annually) is called a
escalation clause
The language in a lease that calls for any increases in property taxes and/or hazard insurance to be passed on to the tenant is called an
ground lease
A lease of vacant land that typically involves a long period of time (25 to 99 years) is called a
percentage lease
A lease whereby the monthly rent is tied to the amount of sales generated by the tenant is called a
assignment
The total transfer of the tenant's right to a 3rd party is called
sublet
A partial transfer of the tenant's rights to a third party is called
contract rent
The actual rent of a property that is specified in the lease is the
market rent
The rent that a property could command, as if vacant, based on current rents of similar properties is its
condominium ownership
Individual ownership of a space of air plus undivided ownership of the common elements defines
cooperative
The type of ownership whereby land and building are owned by a corporation which leases space to its shareholders is called a
planned unit development (PUD)
Individually owned lots and houses with community ownership of common areas (HOA Subdivisions) defines
Timeshare ownership
defines the exclusive use of a property for a specified number of days each year
Association dues
fees collected monthly from unit owners for common area maintenance
condominium conversion
Creating condominiums from existing buildings (ie. An apartment complex or industrial warehouse) is called