Real estate investing can be extremely lucrative for the right type of investor. For real estate investors putting in a long-term commitment, being ready to buy and hold is critical since they may have to wait five to 10 years for big returns on their initial investments.
Those specializing in shorter-term investment options need to be deadline-focused to complete housing projects in a tighter amount of time—often in a few months.
A property’s capitalization rate, or cap rate, is an estimate of the potential return on a real estate investment. While there are a number of ways to estimate the potential return on a real estate investment, most investors use the cap rate as their main metric for forecasting the return on investment, or ROI.
The loan-to-value ratio, or LTV, is a metric used by lenders and other financial institutions to determine the risk associated with issuing a mortgage loan. While the LTV ratio isn’t limited to real estate investor loans, it does factor heavily into the equation for investors who need to obtain financing for real estate purchases.
The term net cash flow has a wide range of definitions because it is used in different capacities throughout business. When used in relation to real estate investing, however, the term net cash flow refers to the difference between the money flowing into and out of the investment property over a particular period of time.
The gross rent multiplier, or GRM, is a formula used to measure a commercial real estate investment’s performance. This metric is typically used to compare different investment opportunities within a market to determine the best opportunity for the investor.
The debt service coverage ratio is an important metric in real estate investing because it indicates the amount of net cash flow that’s available to pay the mortgage on an investment property. In other words, this ratio indicates whether a property will generate enough income for the investor to pay the mortgage on it.