Terms


N.O.I

The Net operating income is simply the annual income generated by an income-producing property after taking into account all income collected from operations, and deducting all expenses incurred from operations.

M.A.O

Definition

The maximum allowable offer is a rule of thumb framework that provides the beginner real estate investor with a formula to determine a ceiling when making offers to sellers of distressed property. It’s the simplest form of property investment analysis there is.

Formula

Maximum Allowable Offer = (ARV- RE) x 0,7

M.A.O Example

  • ARV=90,000$
  • RE=15,000$

(90,000-15,000) x 0.7 = 52,500$

So the M.A.O would be 52,500$

This will be my ballpark price to the seller

LTV

Definition

A lending risk assessment ratio that financial institutions and others lenders examine before approving a mortgage. Typically, assessments with high LTV ratios are generally seen as higher risk and, therefore, if the mortgage is accepted, the loan will generally cost the borrower more to borrow or he or she will need to purchase mortgage insurance.

Formula

Loan to value ratio = Mortgage amount/Appraised value of the property

Example

For example, Bob needs to borrow $92,500 to purchase a $100,000 property. The LTV ratio yields a value of about 92.5%. Since bankers usually require a ratio at a maximum of 75% for a mortgage to be approved, it may prove difficult for Bob to get a mortgage.

Cap Rate

Definition

A rate of return on a real estate investment property based on the expected income that the property will generate. Capitalization rate is used to estimate the investor’s potential return on his or her investment. This is done by dividing the income the property will generate (after fixed costs and variable costs) by the total value of the property. If you want to get technical, it is basically the discount rate of a perpetuity.

Formula

Capitalization Rate = Yearly Income/Total Value