Appreciation refers to the increase in the value of an asset over time. Appreciation can be caused by a number of things including inflation, an increase in demand, or a decrease in the supply of like assets. Appreciation can also take into account added value like property improvements.

Appreciation is usually projected as a percentage of the property’s value over the course of a year.

BER is a ratio some lenders calculate to gauge the proportion between the money going out to the money coming so they can estimate how vulnerable a property is to defaulting on its debt if rental income declines. BER reveals the percent of income consumed by the estimated expenses.

(Operating Expense + Debt Service)

÷ Gross Operating Income

= Break-Even Ratio

A bridge loan is a short-term loan used by a person or company to "bridge" to a permanent loan or to help the borrower carry the property to a sale exit. This type of financing allows the user to meet current obligations by providing immediate cash. The loans are short-term, up to one or two years, with higher interest rates than conventional financing, and are usually backed by some form of collateral such as real estate.

This popular return expresses the ratio between a rental property’s value and its net operating income. The cap rate formula commonly serves two useful real estate investing purposes: To calculate a property’s cap rate, or by transposing the formula, to calculate a property’s reasonable estimate of value.

Net Operating Income

÷ Market Value

= Cap Rate

OR

Net Operating Income

÷ Cap rate

= Market Value

CoC is the ratio between a property’s cash flow in a given year and the amount of initial capital investment required to make the acquisition (e.g., mortgage down payment and closing costs). Most investors usually look at cash-on-cash as it relates to cash flow before taxes during the first year of ownership.

Cash Flow Before Taxes

÷ Initial Capital Investment

= Cash on Cash Return

CFBT is the number of dollars a property generates in a given year after all expenses but in turn still subject to the real estate investor’s income tax liability.

Net Operating Income

less Debt Service

less Capital Expenditures

= Cash Flow Before Tax

A positive cash flow property is an investment property that generates a surplus of money each month after all expenses have been paid. Positive cash flow properties are highly sought after by investors, and are commonly known as "Cash Cows".

DSCR is a ratio that expresses the number of times gross rents exceeds debt service (i.e., total loan payment, including both principal and interest, as well as taxes and insurance).

Gross Rents

÷ Debt Service and other expenses

= Debt Service Coverage Ratio

DSCR results:

Less than 1.0 – not enough income to cover the debt

Exactly 1.0 – just enough income to cover the debt

Greater than 1.0 – more than enough income to cover the debt

Evidence of Insurance (EOI) is a term used to describe the proof that there is a hazard insurance policy in place or ready to place on an asset to protect the borrower and lender in case of loss by fire or other covered perils. Usually it is a one-sheet that is labelled as an Acord 27. The exact form can vary by the property type.

A leveraged return ratio is the investment return calculated on any investment that takes advantage of a loan, or leverage. It is calculated by dividing the net income produced by the asset and dividing that by the initial investment amount.

Calculation: Income – expenses (including interest payment) / initial investment amount

Using leverage is generally advantageous to investors as it usually provides higher returns on a percentage basis, and can help an investor to diversify their holdings across multiple assets by stretching the investable cash into down payments for multiple assets. For example, an investor can purchase one property for $100,000, or, the same investor can get four properties valued at $100,000 each, by putting down $25,000 on each property.

LTV is the ratio of loan amount over a property’s value. A higher LTV generally indicates a higher risk to the lender, which in turn will usually come at a higher borrowing cost.

Loan Amount

÷ Property Value

= Loan to Value

Net Operating Income (NOI) is the income an asset generates after vacancy and all operating expenses are considered. NOI is one of the most important calculations for any commercial real estate investment because it represents the income stream that is used to determine the property’s market value by the income method of valuation or by calculating the cap rate.

Gross Operating Income

less Operating Expenses

= Net Operating Income

Operating expenses are the costs associated with keeping a property in service. These include property taxes, insurance, utilities, property management, and routine maintenance. They do not include payments made for mortgages, capital expenditures, or income taxes.

OER expresses the ratio (as a percentage) of a real estate investment’s total operating expenses over its gross operating income.

Operating Expenses

÷ Gross Operating Income

= Operating Expense Ratio

Real Estate Owned (REO) is an industry term that refers to real assets which have been acquired via foreclosure. This is typically real estate where the borrower has failed to make payments and the bank was forced to foreclose, however, in some cases the owner may be a private individual or the government. REO is not common currently, however from 2009-2015 there were a large number of REO properties in the United States as a result of the Great Financial Crisis of 2009. Diversified Financing Solutions specializes in REO property.

Residential Transition Loan (RTL) is also known as a Fix and Flip loan.  RTLs are designed to assist borrowers who are acquiring and financing a property that is in need of some kind of repairs. RTLs usually have a construction reserve or budget included in the consideration of financing and will have some calculation that results in an After Repair Value (ARV).

A turnkey property, or TKP is a relatively new term for an asset that has been purchased, repaired, and rented to a tenant for the purpose of selling to an investor. Turnkey properties usually cash flow positive to the investor upon sale, hence the moniker "turnkey", as in profitable from the moment you turn the key.

The money that investors set aside to prepare for future vacancies is called a vacancy reserve. It is usually a set-aside percentage of the monthly rent that investors build into their cash-flow projections. The average vacancy provision is 5% for standard vacancy and turnover timelines.