A person who has a special status under financial regulation law. In the United States, the current requirements to qualify are an annual income of $200,000, or $300,000 for joint income, for the last two years with the expectation of earning the same or higher, or a net worth exceeding $1 million either individually or jointly with a spouse.
Accredited Investor as a Company
An entity that was not created for the purpose of purchasing specific security offerings. The company must have assets exceeding $5 million dollars.
This is an upfront fee paid to the investment sponsor (general partner) of a deal for acquiring a new asset. The fee pays for the work that goes into the acquisition, such as due diligence, underwriting, and arranging permanent financing for the deal. This fee ranges from 1-5% of the purchase price and will vary from deal to deal.
Active real estate investors purchase, sell, and manage all aspects of their real estate investment. The investors are hands-on and involved in every part of the deal. Often, they personally guarantee any debt placed on the property.
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Capitalization Rate (Cap Rate)
Cap rate is a measure of risk and way to compare similar real estate investment property to one another. The cap rate is calculated by dividing the net operating income by the current market value of a property.
Example: A commercial property purchased for $12,200,000.00 with a net operating income of $960,029.00 has a cap rate of 7.87%
The monthly cash remaining after paying all expenses. Cash flow is calculated by subtracting the operating expense and the debt services from the effective gross income.
The expenses, paid by the buyers and sellers may pay to complete real estate closing. These costs include origination fees, appraisal fees, environmental inspection costs, application fees, recording fees, attorney fees, underwriting fees, due diligence fees, and credit search fees.
The limited partners' portion of the profits. Distributions are made monthly, quarterly, annually, upon a sale or refinancing of a property.
The process of confirming that a property is as advertised. Due Diligence is arguably the most important step in purchasing investment real estate. During this process a buyer will audit financials, perform property inspections, and do lease audits.
A payment by the buyer, that acts as a security deposit and is a portion of the purchase price. The deposit indicates the buyer is serious and has the means to perform.
The unlevered value of your property. Property Value - Mortgage Balance = Equity. If your property is worth $5 million and you own $2 million, your equity is $3 million.
The predetermined plan to sell an investment property at the end of an investment period.
With a gross lease, the landlord pays for all the operating expenses. This type of agreement is not common in commercial real estate.
A way of calculating an income producing property's value based on the income it produces.
The amount charged to a buyer, by the bank to use their funds.
Letter of Intent (LOI)
A non-binding agreement created by a buyer with purchase terms they intend to formalize, based off the current information provided by the seller. Also referred to as LOI.
Leverage uses borrowed capital or debt to increase the cash-on-cash return on investment. When an investor uses leverage responsibly, they can significantly increase their returns.
Example: Putting money as a down payment for a larger loan rather than buying a property out right could produce a 10% cash-on-cash return, whereas investing without leverage might give you 7% cash-on-cash return
Limited Partner (LP)
A partner whose liability is limited to the extent of their share of ownership. Also referred to as a LP. In commercial syndication, the LP is in charge of contributing financially, to initially purchase property. Additionally, the LP has no obligations to participate in daily management or operations.
Loan-to-Value Ratio (LTV)
The ratio of the loan amount to the property value. If you have a 75% LTV on a $1 million dollar property, this means your Loan is $750,000 and your down payment was $250,000.
Modified Gross Lease
Modified gross leases can vary from property to property. Similar to a NNN lease, the tenants typically pay a proportionate share on the building insurance, taxes, and some maintenance. Though, unlike in a NNN lease, the landlord will arrange care for the building and grounds.
A true triple net lease is very simple. The tenant pays for all expenses of the property, utilities, repairs, even property taxes. The three N’s represent taxes, building insurance, and maintenance.
PPM (Private Placement Memorandum)
A legal document provided to prospective investors that outlines the terms of the investment and risk factors that could be involved.
Preferred Return (Pref)
The pref can be up to an 8% cash-on-cash return on your investment. This percentage represents the return the preferred investors (limited partners) will receive before the sponsors (general partners) on a given deal.
An investor’s receipt when joining a limited partnership. This document tells investor the number of shares they are purchasing, at what price, and what the payout structure will be.
Real estate syndication is a way for passive investors to invest in properties larger than they could purchase individually. Investment sponsors (General Partners) pool passive investor (Limited Partners) cash together, to purchase quality, cash flowing assets.
A waterfall, as it relates to investments, is the process of prioritizing the distribution of profits among passive investors and sponsors. One of the main functions of an investment waterfall is to give the sponsor an incentive to achieve a particular return for their investors. Typically, the sponsor doesn’t get paid until the passive investor gets paid.