The First 10 Multifamily Investing Terms You NEED to Know
Updated: Sep 17, 2020
Jargon [ jahr-guhn, -gon ]
The language, especially the vocabulary, peculiar to a particular trade, profession, or group.
Like any industry, real estate investing has its own jargon. The commercial multifamily space has even more specialized language that can seem intimidating at first. But fear not, I’m going to arm you with the first 10 words you need to learn to at least understand conversations as you get started. Will knowing and understanding the terms in this list make you an expert? No, of course not. Like any language, you must first learn the most commonly used words then continue to add blocks like a Lego castle of real estate jargon (sorry, that analogy kinda went off the tracks). What I can promise you is that knowing these words at a bare minimum will leave you better prepared to absorb information from YouTube videos, podcasts, and books on the topic. At best, it will give you an “aha!” moment and boost of confidence while having conversations with other aspiring investors, proud that you “get it.”
It is worth noting that the second definition listed for jargon was “unintelligible or meaningless talk or writing; gibberish.” That’s because, if you use these words absent context and appropriate usage, you will sound like you’re spouting nonsense. To do my small part to save you from that fate, I will provide examples for many of the words. If you don’t understand an example at first, read on, as understanding one word will inform your understanding of another, and it will all weave together into a beautiful lexiconic tapestry.
I know this is going to blow some people’s minds, but I’m not going to make this list in alphabetical order. I think it would be far more beneficial for all of you if I list them in order of ascending complexity. This list is based purely on my experience (and humble opinion), so please don’t yell at me and say, “Everyone knows what ______ is!” One, because you would be wrong, and two, because this is as I admitted, very subjective. Without further ado!
1. Residential Multifamily- A residential property that is 2-4 units. This is where most multifamily investors got started (including myself). I bought a duplex in Richmond, VA., held onto for four years, before doing a 1031 exchange into a triplex in St. Petersburg, FL.
2. Commercial Multifamily- This is any residential property that is five units or more. The most important distinction between residential and commercial multifamily is how they are valued. The value of a residential property is generally based on comparable properties (similar square footage, number of bedrooms, etc.), whereas commercial multifamily is valued like a business, and so the income it generates is a far more significant factor.
3. Syndication- Generally, it is the process of raising money from investors to buy something. For our purposes, that “something” is a commercial multifamily building. Please be aware that real estate syndications are securities and are actively regulated by the Securities and Exchange Commission (SEC). So if you are putting the deal together, you need to have a securities attorney. It may be expensive, but it’s better than, well, federal prison.
4. Passive Investor- Also known as the Limited Partner or LP (if you want to sound hip and in-the-know), passive investors provide funds for real estate deals with the understanding they will have little control over the day-to-day running or decision making of the deal. They are most often compensated with a preferred return or split of sale proceeds (or both).
5. General Partner- Also known as the GP, deal Sponsor, or Syndicator, this is the individual (likely multiple folks) putting the deal together. They are responsible for the day-to-day management of the deal as well as making key decisions.
6. Accredited Investor- An individual with an income of at least $200k per year for the last two years or a $1 million net worth (not including primary residence). For married couples, it is a combined income of $300k per year for the last two years. The difference between accredited and sophisticated investors (up next) will become significant as you begin to navigate the relevant SEC regulations governing real estate syndications. It is also helpful to know which one you are, as you consider investing passively in a deal because you will be asked.
7. Sophisticated Investor- This is someone determined to have sufficient investing experience or education to weight the risks and benefits of an investment adequately. If you’re thinking, “Tim, that sounds pretty subjective!” then you would be right. From the SEC perspective, they want you to have a substantive relationship with the potential sophisticated investor. Also vague, but my best (non-legal) advice is to have multiple touchpoints and, above all, ensure your interests are aligned.
8. Classes of Property- While not a single word or phrase, understanding the different classes of multifamily properties and neighborhoods is fundamental to determining your investment criteria, whether you choose to invest passively or start syndicating yourself.
Class A Properties
· Relatively new or recently renovated
· Best amenities (think dog-parks, trash valet, clubhouse, etc.)
· Most expensive on a per-unit basis (within a respective market)
Class B Properties
· Although older than A properties, still reasonably modern and in good condition
· Good landscaping and decent amenities
· Mainly serve middle-class tenants
Class C Properties
· Design and functionality may be outdated
· Few amenities
· Caters to a more working-class demographic
Class D Properties
· Need a lot of work
· No amenities
· Rough properties in rough parts of town, often with high vacancy
* Neighborhood classes run along the same logic, so I won’t bore you with the repetition. As a general note, just keep in mind this can be thought of on a risk/reward spectrum. Class A properties are much lower risk and therefore offer lower returns. Those brave enough to invest in Class D properties face serious risks, but may also be rewarded with big payoffs. Many investors (like myself) try to find the sweet spot of finding a C Class property in a B Class neighborhood so we can bring it up to the standards and rents of the surrounding area.
9. Net Operating Income (NOI)- Effective gross income (rent+any other income from the property) minus the operating expenses. For example, if you have a 56-unit apartment that brings in $940,000 per year in rent and another $1,000 from on-site laundry, you have an effective gross income (EGI) of $941,000. If you have $520,000 in overall expenses, this means your NOI is $421,000 ($941,000-$520,000=$421,000). *NOI does not include the debt service (mortgage)!
10. Value-Add Property- A property where we can add value, whether it be through renovations or additional amenities, both of which allow us to raise rents to market rates. You can increase income through a variety of means like storage rental, laundromats, etc.). Another way to add value is by reducing costs through items like water conservation renegotiating the cost of regular services like lawn care or pest control. By adding value to the property, you ultimately increase the NOI and, therefore, the value of the property.
I originally wanted to do the “Top 20 Multifamily Investing Terms You Need to Know,” but I quickly realized this would quickly get overwhelming (and loooong). So, to avoid having this looking like a dictionary, I culled it down to these 10. Hopefully, you get value out of this but be warned, this is only the tip of the multifamily jargon iceberg.
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Ready to start passively investing in multifamily real estate and want to see if our opportunities might be a good fit for you? Click here to visit our website to learn more or reach out to me directly at Tim@ZANAinvestments.com.