Four Phrases Condo Investors Must Understand
As with any industry or business, there are plenty of terms and jargon that are not easily understandable to the newcomer. If you are in the early stages of planning a career or side hustle in investing in condos, then learning what these phrases mean, and the detail behind them, is essential to your success.
As with most financial trades, there is a host of math and calculations to track to ensure your figures add up, but before all that, ensuring you understand the definition is a key part of being a good investor.
Let's take a look at the common key terms for those investing in condos. Here are the top five terms to know and understand.
What is A Return on Investment (ROI)
This is a familiar term for any business, it defines how much you get compared to how much your put in. Without an ROI no one would be investing in anything, and while its a simple piece of math, (ROI = (money from investment subtracting the cost of investment) divided by the cost of investment), it provides you with a guide to how profitable your property is, or could be.
So, if a condo you acquired ten years back cost $200,000, with appreciation of 4% per year, for a condo currently worth $300,000. Not too shabby!
Plug those numbers into the ROI formula and we can determine the ROI:
ROI = (300,000 – 200,000) / 200,000
ROI = 100,000 / 200,000
ROI = 0.5
ROI = 50%
And there you have it, a 50% return, which is impressive. By using estimates based on historical averages, you can easily figure out the likely ROI for cities areas and different types of property.
What is Pre-Construction Appreciation
For those who get in early on a condo build, the value of pre-construction appreciation can be a major benefit. By paying at the current value of a condo, for a building that likely won't be ready to live in for several years, you are likely already making money.
Presumably, the property market will continue to rise, so the value of the condo will be greater when it finally comes time to sell or rent it out. This is termed pre-construction appreciation.
What is Net Operating Income (NOI)
Again, all businesses need to know their net operating income, which is the value of your revenue once you've taken off any costs, which can include insurance premiums, utility charges, and any maintenance required.
The sum is simply NOI = Revenue – The sum total of your expenses
Therefore, if a condo earns $22,000 each year in rent ($1,833 per month) and those regular expenses (usually charged monthly) include: property taxes at $200, condo fees at $150, and insurance is $50. For total expenses of $400 each month, which adds up to $4,800 per year.
That would mean that your NOI is 22,000 – 4,800 = $17,200.
Using the NOI calculation and resulting figure, you can work out the best properties to invest in or where you need to minimize expenses.
What is the Capitalization Rate
Having established the value of your ROI and NOI, you can work out a slightly more advanced way to establish your returns, using the capitalization rate (or, cap rate).
The result provides a percentage answer and is expressed as follows.
Cap Rate = NOI / Current Market Value
Using the NOI value from the sum above – $17,200 NOI, we factor in a $360,000 market value for your latest condo.
So, your cap rate = $17,200 / $360,000 = 0.047
The result is a percentage (4.7%), but people usually round it up to the nearest whole number and simple call it a "cap rate of 5" which can be used to compare to other properties, and when talking to other condo investors as a common frame of reference.
What is Refinancing
Refinancing is a common tactic to save the investor sizeable sums of money per year. While it may sound scary, all you are doing is trying to find a better interest rate or loan terms for your property.
It can be done purely to get a lower interest rate, or if you are rolling up several investments into one, or trying to free up capital for further investments.
You'll need to discuss the specifics with a mortgage broker, but people with money and a track record of investments are considered good bets and can refinance on good terms.
By knowing these terms, what they mean and how to figure them you, you will be a more informed and savvy condo investor.