5 Real Estate Investing Terms You've Got To Know When You're Just Beginning

When I first started to sell rental property, I discovered that real estate investing has a host of terms that are foreign to a rental property newbie, someone new to the world of real estate investing.

They were not only unlike any term I used to sell residential property, but many took me a while to understand what they meant conceptually. In the beginning, when I first heard some of those terms used, I might as well have been in downtown Barcelona trying to interpret instructions on how to get to the Placa Catalunya.

Over time, of course, I did learn these real estate investing terms and since have taught many of my colleagues their meaning as well.

It seemed like a good idea, therefore, to share a few of the more commonly used and perhaps misunderstood terms with you. After all, it never hurts to help a beginner new to real estate investing get started on the right foot without having to bare the embarrassing moments I felt.

APOD

This is a classic choker, the one term that everyone new to real estate investing hearing it for the first time has no idea what it means. Even if you did a Google search for the term APOD, you won’t find the correct meaning for any page soon.

An APOD is an acronym for annual property operating data and is a report used in a rental property analysis. It is highly popular mostly because it is concise. On just one page, it essentially gives a snapshot of a rental property’s income and expense performance for one year therein offering a real estate investor or investment analyst a good first-glance look at a rental property’s financial performance.

Gross Scheduled Income

Gross scheduled income (or GSI) is the total annual rental income an income property would generate if all the rentable space were occupied and all rent collected. Sometimes called potential gross income, gross scheduled income is an estimate intended to show the maximum potential income without regard to any vacancy or credit losses, and this is the reason why GSI is misunderstood.

Whereas a beginner considers it gross income (actual) it’s gross income (scheduled). In this case, if a ten-unit apartment has any vacancies you want to plug in a market rent for the vacant units and combine those rents with the actual rents collected for the occupied units. In other words, the gross scheduled income reflects the annual rental income as if the apartments were 100% occupied.

Operating Expenses

The operating expenses include those costs associated with keeping a rental property in service. Among others, operating expenses include costs for routine maintenance and repair, utilities, property taxes, insurance, and management fees. They do not include the mortgage payment (or debt service), income taxes owed by the investor because of owning the subject investment, or allowances for depreciation.

Net Operating Income

Net operating income (or NOI) is a property’s income after being reduced by vacancy and credit loss and all operating expenses. The reason it’s on this list is due to the role it plays in the calculation for cap rate (a return almost anyone who starts selling rental properties has undoubtedly heard, i.e., net operating income divided by a rental property’s sale price equals cap rate).

But it’s equally important for beginners to understand why NOI is a component of the cap rate computation, moreover, why it’s important to lenders. Net operating income is the amount of income generated by the rental property that services the loan payment and in fact would be the cash flow (before taxes) if the property were owned outright.

Before and After Tax Cash Flow

The cash flow generated by a rental property is, of course, the rhyme and reason behind investing in real estate in the first place. No prudent real estate investor is about to risk his/or hers nest egg unless the income property is profitable.

The cash flow before tax represents the amount of income left over after the loan payment is deducted from the net operating income. The shortcoming here is that it does not take into account the cash flow the investor would receive after adjusting for income taxes and tax shelter.

Cash flow after-tax signifies the cash flow available after debt service and after adjusting for income taxes and tax shelter. It has nothing to do with the cash flow left over after property taxes (as some who are new to real investing believe), but the cash flow a real estate investor can expect to receive after deductions are made for such things as depreciation and mortgage interest and adjustments are made based on whether the investor has a tax liability or loss).

James Kobzeff is a real estate professional and the owner/developer of three investment property analysis software solutions for real estate investors and agents engaged in real estate investing.