An asset, as defined by the IRS, is any tangible item of extensive value that cannot be easily converted to cash.
Example: Assets such as property, equipment and securities held for investment.
Capital Expenditure (CAPEX)
Funds used to acquire or improve a physical asset, such as equipment or property, which adds value to that asset. The improvement or asset purchased is to have a life of more than one year, and is typically depreciated over its useful life.
Example: ABC Company added a new parking lot to its store at a cost of $100,000. The $100,000 improvement is a capital expenditure.
An appraisal method to determine a property's value by deducing the property's net income with a percentage that represents a reasonable return on the money invested.
Capitalization Rate (CAP Rate)
The percentage of the purchase price which the property returns annually.
Example: A property that was bought for $1,000,000 has a Net Operating Income of $100,000. The CAP rate is 10%.
The act of classifying expenses as an asset, which allows the asset to be paid (depreciated) over multiple time periods where profit is resulting.
The value of an investment after use of the capitalization approach of appraisal.
Example: A small shopping center generates $50,000 annual income. The capitalization rate for this type of property is 10%, considering the value and time period of expected income. The $50,000 income is divided by 10%, of which the capitalized value is $500,000.
The net income of an investment calculated by deducting all operating and fixed expenses from the gross income.
Example: Statement of Cash Flow
Potential gross income
Less: vacancy and collection allowance
Add: miscellaneous income
Effective gross income
Less: operating expenses
Less: replacement reserve
Net operating income
Less: principal payment
Cash Flow $20,000
Cash Flow Mortgage
A form of mortgage where all or most of the net operating income is paid to the lender for a time period agreed upon by both parties.
Example: ABC Company's property is in debt due to the weak market. The lender converts the mortgage to a cash flow mortgage, as opposed to foreclosing.
The annual cash flow received by an investor.
Expressed as a percentage, calculates the annual dollar income on the cash invested.
Example: ABC Company puts down 20% cash as a down payment for a property it just purchased. Cash-on-cash return determines its annual income on the property in relation to the down payment. The calculation is Annual Dollar Income divided by Total Dollar Investment.
Common Area Maintenance (CAM)
The operating expenses incurred by a landlord to maintain the common areas. CAM charges, as they are typically called, may be recovered from Tenants as additional rent on a pro-rata basis and/or included in base rent or as otherwise stipulated within the lease.
One of three real estate appraisal methods used to estimate the value of real estate. The formula is Cost of Reconstruction - Depreciation + Value for Land = Property Value.