By Paul Branton, Director of Investor Services for Home Rental Services
Welcome back! It was about a month ago when I introduced you to some terms used in real estate investing. To get you caught up, here’s a link to that post:
Real Estate Investing Lingo Defined – Part 1
As you saw at the end of that post, I said we would be breaking down this sentence:
Hey Suzy, check out this turn-key deal! I can get a cap rate of 8%, maybe 9% if I do a few things to force appreciation; would you be open to doing a JV with me on this deal?
Let’s jump right in!
Turn-Key: A “turn-key” property is basically what it sounds like… everything has been done for you. All you have to do is purchase it. This generally includes everything from the full scale renovation of the property to placing the tenant. With a “turn-key” property, you should be able to close on the property and have it be a performing asset. The advantage of “turn-key” is it removes you from holding the property during the renovation and marketing/tenant placement time.
Cap Rate: Cap Rate is short for Capitalization Rate. This is a common measure for evaluating the value of a real estate investment. The way you calculate the cap rate is by taking the net operating income and divide by the current market value of the asset. (Cap Rate = NOI/Market Value) For example, if you have a property with a NOI of $16,000 that is worth $200,000 then your cap rate is 8%. ($16,000 / $200,000 = .08 = 8%)
Forced Appreciation: Forced Appreciation is an increase in the value of the asset due to the intentional actions of the owner. (Not natural/market appreciation.) You can force appreciation in numerous ways. The most common being increasing rents and decreasing expenses… both of which will increase your NOI.
Joint Venture (JV): In its simplest form, a joint venture is a business arrangement where two or more parties pool resources for the purpose of accomplishing a specific goal. In a joint venture, each of the parties is responsible for profits, losses, and costs associated with the investment.
This is another example of industry specific lingo that can be intimidating to people getting into real estate investing. My hope is that these four terms make more sense to you after reading the definitions. If you have any questions, just give us a call! Home Rental Services has been helping real estate investors since 1989.