The acronym REIT stands for Real Estate Investment Trust.

This is a security that sells like a stock on the major exchanges and invests in real estate directly, either through properties or mortgages.

REITs receive special tax considerations and offer investors high yields, as well as a highly liquid method of investing in real estate. Essentially, it is a liquid, dividend-paying means of participating in the real estate market.

We can distinguish between a few differing types of REIT.

Equity REITs: Equity REITs invest in and own properties (thus responsible for the equity or value of their real estate assets). Their revenues come principally from their properties’ rents.

Mortgage REITs: Mortgage REITs deal in investment and ownership of property mortgages. They loan money for mortgages to owners of real estate, or purchase existing mortgages or mortgage-backed securities. The revenue is generated mainly through interest earned on the mortgage loans.

Hybrid REITs: Hybrid REITs combine both investment strategies of equity REITs and mortgage REITs by investing in properties and mortgages.

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The Capitalization Rate or Cap Rate is a ratio used to estimate the value of income producing properties. Put simply, it is the net operating income divided by the sales price or value of a property expressed as a percentage.

For example, if a building is purchased for $1,000,000 and it produces $100,000 in positive net operating income (the amount left over after fixed and variable costs are subtracted from gross lease income) per annum, then: $100,000 / $1,000,000 = 0.10 = 10%
The asset’s capitalization rate is therefore ten percent.

A market cap rate can be determined by evaluating the financial data of similar properties which have recently sold in a specific market. Once this is applied one can estimate a purchase price for the property, or conversely a selling price.

The Loan to Value ratio (LTV ratio) is a key term in real estate financing.

Quite simply, it is the ratio of equity and debt that combined make up the fair market value of a particular property. In the case that the loan is used for financing a property purchase, the ratio displays the amount the lending instituion is willing to lend against the total cost.

Using an example – if one is hoping to acquire an office building for 20,000,000 and the LTV offered by the bank is 80:20, it follows that the purchaser requires $4,000,000 (excl. purchase costs).

The basic rule is that the higher the LTV, the higher the interest rate charged. This reflects the risk taken on by loaning a larger percentage of the property. However, many lending institutions are currently attempting to minimise risk after recent global events, and so higher LTV’s are becoming increasingly difficult to secure.

A triple net lease is a type of commercial leasing agreement. In a triple net lease, the lessee pays, in addition to rent, all expenses associated with the property such as property taxes, insurance and maintenance and operation charges. The length of a triple net lease can vary, but many leases last for at least 50 years.

The triple net lease is sometimes called a true net lease, because the landlord has no responsibilities related to building upkeep. This hands-off type ownership is the reason that many commercial landlords favor triple net leasing options. The building can generate a high level of income while the tenant keeps it in good condition, generally making improvements as well.

While at first glance it may seem like an attractive rent structure, the landlord should be aware of inherent risks. The main risk being the inability of the tenant to pay fees, and subsequently allowing the building to fall into disrepair. In extreme cases, a tenant may intentionally damage a building in order to collect insurance money. For this reason, it may be prudent to include a reserve fund. The tenant makes regular payments into the reserve fund, which can be used to cover essential repairs in the case of emergency.

A very common term, ROI is a performance measure used to evaluate the efficiency of an investment. it is also a useful indicator when comparing numerous investments.

Calculating the ROI is fairly straightforward and is done by dividing the return on an investment by the cost of the investment; the result being expressed as a percentage or a ratio.

Basic Example:
Money Invested: 100,000
Money Returned: 120,000
Gain: 20,000
ROI = 20%

Return on investment is a popular measure due to its versatility and simplicity. However, one needs to be careful as its flexibility has a downside. ROI calculations can be easily manipulated to suit the user’s purposes, and the result can be expressed in many different ways. With this in mind, Its vital to know and understand which inputs are being used to derive the figure.

Investors will come across this term when examining the financials behind an existing property. Essentially, it is the assets gross income less operating expenses.

NOI = Gross income – Operating expenses

Gross income incorporates both rental income and other income derived from the property, such as parking fees, laundry, vending machine receipts, etc.  Basically, all income associated with the property.

Operating expenses are costs incurred through the operation and maintenance of the property.  These tend to include repairs and maintenance, insurance, management fees, utilities, supplies, property taxes, etc.  It is important to note that the following costs are not classed as operating expenses – capital expenditures, depreciation, principal and interest, income taxes, and amortization of loan points.

NOI can give a potential investor a good insight into an assets performance, particularly as it is less susceptible than other figures to manipulation by management.