It’s All Greek to Me: Common Real Estate Terms Defined

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5. Debt-Service Ratio

The ratio between NOI and your annual debt service is known as the debt-service ratio. This is typically the way a lender monitors an asset’s performance.

Lenders generally require a debt-service ratio in the range of 1.1 to 1.5. In some situations, a lender may require a minimum debt-service ratio to be maintained for the life of the loan. For example, if your annual NOI is $100,000 and your annual debt service is $70,000, the debt-service ratio is 1.42.

4. Reverse Leverage

Reverse leverage is when the interest rate on funds borrowed to purchase an asset exceeds the return on investment a buyer will receive. For example, if a cap rate or investor’s targeted return on an investment is 7 percent and the interest rate on the funds borrowed to purchase the investment is 8 percent, this would be considered reverse leverage.

Typically, reverse leverage will deteriorate an investor’s return on equity and is sometimes a deal killer! A period of reverse leverage conditions in the market reduces values in general and has a negative impact on the ability to sell a property.

3. Real Estate Investment Trust

Real estate investment trusts (REITs) are generally publicly traded companies that own, develop or operate commercial properties. They are required by law to distribute 95 percent of the NOI that allows them to avoid paying corporate tax (but you get the taxes). Some well-known self-storage REITs are Public Storage and Extra Space.

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