If you’re considering diving into a residential real estate investment in Ontario, there are several terms you should become familiar with. It’s always best to seek professional advice before investing your savings. There are realtors that can guide you throughout this process. Be sure to hire the right agent with specific knowledge in real estate investments. Let’s start with some important definitions.
Leverage: using borrowed money to increase potential ROI (return on investment).
For example, if you make a 20% downpayment on a property, then 80% of your investment is leveraged.
ROI (Return on investment): tool used to evaluate the performance of an investment.
ROI=Net Operating Income (Gross Operating Income-Expenses) ÷ Initial Investment
OCR (Overall Cap Rate): the rate of return expressed as a percentage on a real estate investment property based on expected income.
Overall Cap Rate = Net Operating Income ÷ Value
Cash-On-Cash: the correlation between the cash earned and the cash invested in a given time period
Cash-On-Cash=Cash Flow Before Taxes ÷ Equity (Cash) Investment
These are only some of the commonly used investment terms. Before anything, it’s essential to get familiar with them. I would highly recommend purchasing and reading investment books prior to taking the plunge. Some people tend to convince themselves that their investment properties are performing better than they actually are. Don’t make the mistake of turning a blind eye! A prudent investor thoroughly analyzes the specifics of a given property. Good luck!
George El Masri
Royal LePage Meadowtowne Realty