Real Estate Investment Glossary

10 years return rate

Formula: ROI * 10

Cap Rate

The cap rate (short for capitalization rate) is a simple way to measure how much money a property earns compared to its price. It’s calculated by dividing the annual profit (after expenses) by the property’s price and turning that into a percentage.

Formula: Net Operating Income / Current Market Value

Cash on Cash Return

Cash-on-Cash Return measures the annual cash flow of an investment property as a percentage of the total cash invested. It's often used by real estate investors to evaluate the profitability of a property. This is especially interesting for investors using financing, as they could generate relatively high cash flow compared to the amount of cash they initially invested.

Formula: Yearly Net Profit before Tax / Total Cash Invested

Current Property Market Value

Formula: Median listed property prices of properties with same number of bedrooms in the market

DSCR

DSCR (Debt Service Coverage Ratio) is a financial metric used to evaluate a property's ability to generate enough income to cover its debt obligations. It’s widely used by lenders to assess the risk of financing a real estate investment.

Formula: Net operating Income / Total Debt

Gross Rental Yield

Rental yield is a measure of the return on a property based on its rental revenue (before opearting expenses) relative to the property's purchase price.

Formula: Yearly Revenue / Purchase Price

IRR

IRR is the discount rate that makes the Net Present Value (NPV) of cash flows from an investment equal to zero. IRR is used to evaluate the profitability of an investment by considering all cash inflows and outflows over time. The higher the IRR, the better the investment return. IRR is useful to understand the true opportunity cost of buying a real estate.

Formula: TODO

Long Term Rental Income

Total amount of rental income you would earn per year from your rental property.

Formula: - data from Airbtics

Monthly Profit before taxes

Monthly Profit shows the amount of money you would earn every month from your short-term rental after paying for operating expenses and mortgage payments.

Formula: Yearly Net Profit before Tax / 12

Monthly Revenue

Monthly Revenue shows the amount of money you would earn every month from your short-term rental.

Formula: Yearly revenue / 12

Mortgage Pay (Debt service fees)

Total amount of mortgage payments you'll make per year.

Net Operating Expenses

Total amount of yearly expenses to operate a preoprty. Typical operating expenses are property management fees, maintenance, insurance, utilities (wifi, electricity, gas), and HOA fees.

Formula: Sum of

Net Operating Income (NOI)

Net Operating Income (NOI) shows annual cash flow before deducting mortgage payments and taxes. It shows the rental property's cashflow after deducting operating expenses.

Formula: Revenue - Net Operating Expenses

Net Profit before Tax

Net Profit before Tax shows annual cash flow before deducting taxes It shows the rental property's cashflow after deducting operating expenses and mortage payments.

Formula: Revenue - Net Operating Expenses - Mortgage Payments

Net Rental Yield

Rental yield is a measure of the return on a property based on its rental income (after opearting expenses) relative to the property's purchase price.

Formula: Net operating Income / Purchase Price

Nightly Rate

This is a median (50th percentile) booked nigthly rate of 12 comps on Airbnb and VRBO. The observation period is between 2023 September to 2024 August. It does not include cleaning fees, platform fees, or extra guest fees.

Formula: Average Nigtly Rate of booked nights

Occupancy Rate

Occupancy rate is the ratio of booked nigths and available nights for a short-term rental. This is a median (50th percentile) occupancy rate of 12 comps on Airbnb and VRBO.

Formula: No. of booked nights / No. of available nigths

Revenue

Revenue: This shows the average earnings for listings in a specific market. Revenue is calculated using the following equation: (Median nightly rate * 365 * Occupancy) + (Cleaning fees * Number of reservations) On a side note, if we don't have the information about the number of monthly reservations, we assume it to be 1.

Formula: Occupancy * ADR

RevPAN

RevnPAN is a key performance metric to measure the average revenue generated per listing for each night it is available for booking.

Formula: RevPAN = Total Revenue / Total Available Nights

ROI (Previously, annual rate of return)

ROI is the amount of value a rental property is adding per year compared to the cash you invested. This includes yearly property appreciation value and yearly net rental profit.

Formula: ((operating income + sale price – acquisition cost) / acquisition cost) / period acquisition cost = (purchase price + startup cost)

Seasonality

Seasonality reflects how revenue changes throughout the year by comparing each month's average revenue to the overall yearly average.

Formula: % differences between high and low seasons

Startup Cost

Startup Cost includes all the costs you need to purchase a property and start an Airbnb, but does not include downpayment.

Formula: Remodeling + Home Furnishing + Closing Costs

Taxes

Formula: Property Tax + Income Tax - Depreciation

Total Cash Invested

Formula: Downpayment + Startup Cost

Total Expense

Total Expenses includes operating expenses, taxes and mortage paymetns.

Formula: Mortgage pay + Operating Expenses + Taxes

Total Profit when Sold

Formula: TODO

Trend

It is predicted increase of short-term rental revenue in the next year based on year over year revenue changes observed between 2022 and 2024.

Formula: 3 years average year over year changes in median short-term rental RevPAN