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This list is a combination of
common real estate investing terms, real estate investing
best practices and tips for getting the most out of the Rental Property Calculator toolset. Click any of the properties above to see
the RPC tools in action!
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| Annual Maintenance |
| This assumption is intended to include items such as paint, carpet, repairs, lawn care, utilities during vacancy, advertising etc. On the CFP property analysis tool, this assumption is affected by the Annual Rent Inflation assumption. For example, if you assume that the rent will increase by 2.5% per year to adjust for inflation, your annual maintenance assumption will also increase by 2.5%. |
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| Annual Property Appreciation |
| This is the percent that you expect the property to increase in value each year. The national average for property appreciation was 6.27% in 2002. |
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| Annual Rent Inflation |
| On the CFP property analysis tool this is the percentage that rent will be increased each year to account for inflation. This inflation value is also applied to the Annual Maintenance assumption.
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| CFP Score |
This is a proprietary Cashflow Property Network scoring system that allows investors to compare properties using a common set of variables. The formula considers the cash flow potential based on the size of the property, the price of the property and the strength of the rental market that the property is located in. As a frame of reference, a property with a CFP score of 80 indicates that the property will be cash flow breakeven on a monthly basis with a 10% downpayment*.
*Assumes the following: 7% interest rate 30 year loan 1% property tax .5% hazard Insurance 7% property management fee .5% Private Mortgage Insurance |
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| Debt-To-Income Ratio |
| This is a formula that lenders use to determine the risk and viability of loans. Typically the lender will divide your monthly debts (credit card payments, PITI for houses etc) by the sum of your personal income and 75% of your rental income (lenders assume 75% occupancy). Generally lenders want your Debt-To-Income ratio to be below 45%. |
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| Display X Annums |
| On the CFP property analysis tool, this is the number of years that are displayed in the pro forma. For example, if you enter 30 in this assumption you will see 30 years worth of data in the multi year pro forma section of the propert analysis. |
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| Downpayment |
| This is the amount of money that you put towards the purchase of the house. For example, if the purchase price of the house is $100,000 and you select 10% Downpayment on the property analysis tool, you will pay $10,000 towards the purchase of the house. Higher downpayments can lead to lower interest rates and Private Mortgage Insurance (PMI). Typically lenders like to see investors put no less than 10% down on properties that are not to be occupied by the owner. Some investors apply for loans under the guise of vacation homes and make 5% downpayments. There are laws that apply to these types of loans that you should be familiar with.
Higher downpayments can have a small affect on cashflow by producing a smaller mortgage payment, however higher downpayments have a significant impact on ROI. Consider whether you are investing for appreciation or for cashflow and select a downpayment that you are comfortable with. |
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| HOA - Home Owners Association |
| These are often assessed on a property to cover neighborhood improvements. HOA fees range from $0 to $100's per month depending on the neighborhood. Be sure to inquire about the HOA's for any property you are interested in and enter the actual monthly amount in the property analysis tool. |
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| Interest Rate |
| The interest rate that is applied to the loan. In most cases, interest is a tax deductible expense. |
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| Loan Points |
| Paying a percentage of the loan up front is a common way to buy a lower interest rate. This can be a good strategy when you expect interest rates to rise or you expect to own the property for more than five years. While buying points can increase your cashflow via a lower mortgage payment it will negatively impact your ROI because it requires a higher initial investment. |
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| Loan Term |
| The number of years that the loan will last. The longer the loan, the lower the payments, the higher the cash flow. |
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| Monthly Cash Flow |
This is calculated on the CFP property analysis tool by first adding up all the hard monthly expenses including: Mortgage, Property Insurance, Property Management Fee, PMI, HOA, a monthly pro rata of your annual maintenance expense and a monthly pro rata of the property tax. Then the missing income of vacancy is applied. For example, if you rent your property for $1000 and you expect 90% occupancy (10% vacancy), a $100 charge will be used in the monthly cash flow calculation to account for the rent that will be missing over the course of the year.
Rent - (Mortgage + Property Insurance + Property Management Fees + PMI + HOA + Maintenance + Property Tax + Pro Rated Vacancy Charge) |
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| Occupancy Rate |
| This assumption indicates the amount of time over the course of a year that the property has a paying tenant. When analyzing applicants financial strength, lenders typically assume that investment properties will be occupied 75% of the time (9 months per year). Many investors would consider this to be more conservative than their actual occupancy rates. This assumption is used to calculate annual income and monthly income on the property pro forma.
By signing multiyear leases it is possible to get occupancy rates in the 90% range. |
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| PITI |
| Principle Interest Tax Insurance. This are typically the items that lenders will consider as the total expense associated with operating a property. |
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| PMI - Private Mortgage Insurance |
Default insurance on conventional loans, normally insuring the top 20% of the loan and not the whole loan. This is required by lenders when the owner equity is less than 20% of the value of the home. This is calculated on the CFP property analysis as the PMI rate * Loan amount. PMI automatically drops off the CFP property analysis tool when the loan amount is less than 80% of the home value. This happens as the property appreciates and as the principle is paid.
PMI is non-tax deductible and is of no benefit to you the home owner. You can often avoid PMI by taking out a 10-10-80% or similar loan that eliminates any loan being greater than 80% of the value of the property. |
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| Price Per Foot |
| This is the total price of the property divided by the total square footage. |
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| Pro rated vacancy charge |
| On the CFP property analysis tool, this is the rental revenue that will be missing due to vacancy (set in the assumptions as Occupancy Rate) divided by 12 to produce the monthly impact. |
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| Property Insurance |
| Homeowners insurance required by lender to cover fire, flood etc. |
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| Property Management |
| A monthly fee paid to a management company in exchange for operating the property. This can include screening tenants, contracting tenants, collecting rents and responding to tenant and property needs. Though additional fees can be incurred for court appearances and maintenance, this fee should provide total hands off involvement by the owner. The fee is calculated as a percentage of collected rents. |
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| Property Tax |
| Assessed city or county taxes based on the value of the property. |
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| Rent Margin or Diminishing Rent Margin |
Rent Margin or Diminishing Rent Margin: This is an algorithm that is applied to the rent per foot to downwardly adjust the expected rent as the square footage increases. This is based on the assumption that after a certain size, the value of each additional square foot decreases. When turned "Off" for example, a 4,000 square foot house in a neighborhood where rents are $1 per foot would rent for $4,000. The problem, of course, is that you would rarely get such rents. If the market rent of $1 per foot was based on comparable rentals that are 2,000 square feet you would not likely continue to get $1 per foot for your additional 2,000 feet.
When this option is turned "On", the rent assumption is based on charging $1 (100%) for the first 1,500 feet of the rental property, $.70 (70%) per foot for the next 500 feet, $.40 (40%) for the next 500 feet and $.10 (10%) for each additional foot. We have found that this represents a more realistic expectation for the types of houses that we recommend. |
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| Rent Per Foot |
| This is simply the monthly rent divided by the square footage of the property. For example, if a house has 2,000 square feet and the rent is $1,000 the Rent P/Ft would be $.50. |
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| Total Benefit |
On the CFP property analysis tool this is Cash flow + principle paid + annual appreciation
This is normally calculated on an annual basis on a property pro forma or analysis. For example, if a property produced $1,200 per year in cash flow, $1,000 of the mortgage payments were applied to the principle (by way of the rent) and the property appreciated $10,000 the total benefit would be $12,200.
Total benefit does not include tax items such as deductions and depreciation because individual tax rates vary. |
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