Real Estate Acronyms -- Their Meanings Decoded

In my preview post, I gave you a list of some of the most common acronyms used in real estate. Not a complete list, of course, but a good start to decode the secret jargon of our industry.

And as I professed then,  mastering this lingo and using these terms correctly not only facilitates communication but also demonstrates expertise and insider knowledge.

Now that we have a representative list, let’s look at the meaning of some those terms.

CAP – Capitalization (Rate) The ratio between a property’s net operating income and the sum of its purchase price (or value) and capital additions. Read more on another post here. 

CapEx –  Capital Expenditures — An addition to a piece of real estate having a useful life of more than one year, or an improvement that is likely to prolong the life of the property. A capital addition is different from a repair, which maintains rather than increases the life of a property.  Read more here.

CFAT – Cash Flow After Taxes – The cash flow before taxes, reduced by the tax liability that the property generates for the owner, or increased by the tax savings.

CFBT – Cash Flow Before Taxes  During a given period, all of a property’s cash inflows less all of its cash outflows. Inflows are counted whether or not they must be included as taxable income and outflows are counted regardless of deductibility. Cash flow is not affected by depreciation deduction, which is not a cash item. “Cash flow before taxes” ignores the property’s effects on the owner’s income tax liability.

CMA – Comparative Market Analysis  – A form used to estimate the value of a property by comparing it to similar property in the same or a similar location.  Download one we’ve created for commercial properties.  

CoC – Cash-on-Cash Return – The rate of return on an investment measured as the ratio between the cash flow before taxes and the initial cash investment. This is usually a first-year metric, because it doesn’t pay attention to the time value of money. Read more here, including some pros and cons. 

DCF – Discounted Cash Flow – An income-property appraisal technique that estimates value by discounting all expected future cash flows to the present and summing the discounted amounts. This is at the heart of our Real Estate Investment Analysis (REIA) software.

DSCR – Debt Service Coverage Ratio – Net Opertating Income divided by Annual Debt Service. A common underwriting metric  used by lenders.

GOI – Gross Operating Income A property’s annual Gross Scheduled Income, less allowances for vacancy and credit loss.

GRI – Gross Rental Income —  Also PGI (Potential Gross Income)  The annual income of a property if all rentable space were in fact rented and all rent collected; the total potential income.

GRM – Gross Rent Multiplier A method of estimating or expressing a property’s value as a multiple of its gross rental income. This technique is often used with 2-4 unit multifamily houses.

IRR Internal Rate of Return –  The rate of return that discounts all anticipated future net cash flows (including the reversion) back to a present value that equals the initial investment. Another way of saying this: The discount rate that makes the NPV of a property’s income stream equal to zero. Read more about IRR

LP Limited Partner – Along with GP (General Partner), one of the partner class in a limited partnership. Read more here. 

LTV – Loan-to-Value Ratio  The ratio between the total amount of a property’s mortgage financing and the lesser of its appraised value or selling price. This is a common loan underwriting metric. 

MIRR – Modified Internal Rate of Return An alternative to conventional Internal Rate of Return (IRR). IRR may fail to yield a result in a situation where there are negative cash flows. The MIRR calculation takes any negative cash flows, zeroes them out and discounts them at a safe rate back to day one of the investment period. The discounted amount is treated as additional capital needed on day one. MIRR also takes positive cash flows and compounds them forward to the sale year, using the reinvestment rate (also known as the risk rate).  Read more here

NNN Triple Net Lease – A commercial lease structure where the tenant will reimburse the landlord for property taxes, maintenance, and insurance.

NOI – Net Operating Income   A property’s Gross Operating Income less the sum of all operating expenses. NOI represents a property’s profitability before consideration of taxes, financing or recovery of capital. NOI is the basis of appraisal by income capitalization, and of mortgage underwriting by debt coverage ratio.  Read more about NOI

NPV – Net Present Value The discounted value of all of a property’s future cash flows (including the reversion) less the initial cash investment. This is often confused with Present Value. PV is the discounted value of the future cash flows. With NPV you first find the PV of the cash flows but then subtract out the amount of the initial cash investment. Hence, “Net.”

OpEx – Operating Expenses Any expense necessary for the maintenance of a piece of real property and to insure its continued ability to produce income. These are the day-to-day expenses one normally associates with operating a property, such as maintenance, insurance, property taxes, etc. Loan payments, depreciation and capital expenditures are not operating expenses because they are not part of operating the property.

PV  – Present Value The discounted value of a series of future cash flows. See comments under Net Present Value.

This list represents many of “real estate’s greatest hits,” but certainly not all. What other terms would like to have explained? Let us know!