Have you ever wondered what some of the common real estate investing terms mean? I know when I began investing, I didn’t understand what cash-on-cash return meant. Additionally, many investors I speak to are confused by terms like “CAPEX” and “ROI.”
On this episode of Investing in Real Estate, I’m leveling the playing field for anyone who has ever felt overwhelmed or confused by real estate jargon. I’ll explain what some of the common terms and phrases mean, and give specific examples and formulas. If you’ve ever felt unfamiliar to real estate lingo, you won’t want to miss this episode!
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In my experience speaking to investors on the phone, many people simply don’t understand some of the common real estate terms. When I ask them questions about their properties like, “what is the ROI?” or, “what is the rent-roll?” I’m often met with confusion or questions.
The last thing I want is for you to feel like an outsider, and become discouraged to invest due to unfamiliarity of simple terms. Once you have an understanding of what these terms mean, you’ll feel more confident in your investing ventures.
The first thing that confuses people is ROI. ROI is so important when it comes to investing. ROI stands for return on investment, which is a simple formula that calculates how much money you put into a property, and how much you get out of it. There are different formulas used by different investors, but I prefer the following formula.
I multiply the monthly rent on the property by 12 to find what the total income is for the year. Then, I subtract 40% of that total in order to have money set aside for things like vacancy, repairs, and other expenses. Then I divide that number by the all-in cost of the house.
Additionally, I find that many investors are confused about cash-on-cash return, also known as COC. This is also a simple equation; its purpose is to determine your return on out-of-pocket expenses. This means you begin with the total amount of cash paid, unlike ROI where you calculate the total amount of the house, regardless of financing.
To calculate cash-on-cash return, you would multiply the monthly rental income times 12 to determine the total amount of income for the year. Again, you will remove 40% from that number in order to account for expenses. Then, the total will be divided by the amount paid in cash.
On today’s show, I’ll explain even more real estate investing terms, such as CAPEX, rent-roll, and tenant turnover. I’ll give specific examples, and share exactly how they apply to my business. I’ll also elaborate on what factors can affect these terms, and the different ways they can work in your business.
We’re ready to talk about your goals and want to help you learn more about earning legacy wealth for you and your family.
On this episode you’ll learn:
- What factors influence cash-on-cash return?
- Why I personally don’t set aside funds in a CAPEX account.
- What does rent-roll mean?
- What is tenant turnover, and what aspects does it encompass?
- And much more about buy and hold real estate!