Glossary
Income-property underwriting terms, defined
Plain-English definitions of the metrics, documents, and financing terms behind every commercial real estate deal. Each one links to the calculator and the guide that put it to work. New terms are added over time.
Metrics
Cap Rate
Net operating income divided by price. The unlevered yield used to compare and value income property.
Metrics
Net Operating Income (NOI)
Income minus operating expenses, before the mortgage. The number every other metric is built on.
Metrics
DSCR
NOI divided by annual debt service. The coverage ratio a lender sizes your loan on.
Metrics
Cash-on-Cash Return
Annual pre-tax cash flow divided by the cash you invested. Your levered return.
Metrics
Gross Rent Multiplier (GRM)
Price divided by gross rent. A fast, expense-blind first-screen multiple.
Metrics
Debt Service
The annual principal and interest you pay on the loan. The denominator of DSCR.
Metrics
Operating Expense Ratio
Operating expenses divided by income. The fastest red-flag check on a deal.
Financials
Pro Forma
A projection of what a property could earn, not what it has. Treat it as an argument.
Financials
T-12 (Trailing Twelve Months)
The last twelve months of actual income and expenses. The most useful financial document.
Financials
Rent Roll
A per-unit snapshot of who rents what, at what rate. The source of truth on occupancy.
Occupancy
Economic Occupancy
Collected rent as a share of gross potential. What you actually bank, not just filled units.
Financing
Loan-to-Value (LTV)
The loan as a percentage of the property value. How much the bank will lend.
Financing
Combined Loan-to-Value (CLTV)
All loans against a property, first and second, as a percentage of its value.
Financing
Amortization
The schedule that pays a loan down to zero. A longer schedule means lower payments.
Financing
Balloon Payment
The full loan balance that comes due at a short term, well before amortization ends.
Financing
Seller Financing
The seller acts as the lender, carrying a note instead of taking all cash at closing.
Metrics
Gross Potential Income (GPI)
Every unit rented at market for a full year: the income ceiling, before vacancy or expenses.
Metrics
Effective Gross Income (EGI)
Gross potential income minus vacancy, plus other income. What the property really collects.
Analysis
Normalized (Adjusted) Financials
The seller's books restated to what a new owner will actually earn and pay.
Returns
Average Rate of Return (ARR)
The average annual return over the hold, before adjusting for the timing of cash flows.
Returns
Internal Rate of Return (IRR)
The annualized return across the whole hold, accounting for the timing of every cash flow.
Returns
Equity Multiple
Total cash returned divided by cash invested. How many times you get your money back.
From a definition to a decision
Knowing what a term means is the first step; using it to price a deal is the point. Each definition here connects to a free calculator and a step-by-step guide, so you can go from "what is a cap rate" to running one on a real property in a couple of clicks.