6 Unfamiliar Terms for the New Passive Property Investor

When you are new to passive multifamily investing, there are a lot of unfamiliar terms to contend with. Take a look at six you’ve likely never heard of before today but should know in order to support learning the language of the industry you’re entering.

Absorption Rate

Tells you how fast available units are being leased over a given time period within your market. Investor look at absorption rates as it reveals the demand for a property or the trend in a market. If rental activity is shifting (increasing or decreasing), this information can help determine the state of the market the units are in.

Acquisition Fee

The fee paid to the sponsor who is finding, evaluating, arranging financing for and closing your multifamily deal. The fee will vary depending on the deal structure, the cost of the property, and other factors. You should know what this fee will be before you make the formal financial investment into the deal.

Private Placement Memorandum

This document spells out the investment’s terms, why the syndicator is excited about making this purchase, what the plans are for the property, and the opportunity for you as an investor.

Also known as the PPM, it usually contains: introductions (a summary of the offer); the business plan, basic disclosures (such as asset description and risk factors), and the subscription agreement.

Property And Neighborhood Classes

Based on several factors, multifamily real estate has a grading of A, B, C or D. Property grading, factors include available amenities, property condition and its date of construction. For neighborhood grading, factors include median home values and incomes, demographics, school district rankings and crime rates.

Ration Utility Billing System

Also known as RUBS, this a billing method for calculating the utility usage of a tenant based on a pre-calculated formula. There are different things such as occupancy and the square footage of the unit which are part of the formula. The calculated amount is then billed to the tenant.

Value-Add Property

Adding value can refer to many things. However the key here is to ensure your property is operating at the highest possible level. Boosting the properties income and/or decreasing overall expenses is the ultimate goal. This may include improving operations and/or improving interior and exterior features.

Learning as you go is easier when you are working with an experienced investor, but it’s always nice to have a head start. Learning multifamily jargon ahead of time, helps you prepare.

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