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?Real estate can be a profitable investment, but it also involves risk. Understanding real estate finance can help you make sound investment decisions.

In this article, we will learn about some of the key terms used in real estate finance. Understanding these terms will help you better understand your real estate investments.

Key Terms

Capitalization rate (Cap rate): The rate of return on a real estate investment. It is calculated by dividing the net operating income by the purchase price.

Cash on cash return (CoC return): The amount of cash you earn on an investment, expressed as a percentage of your initial investment. It is calculated by dividing the annual cash flow by the purchase price.

Gross rent multiplier (GRM): The ratio of the purchase price to the gross annual rent. It is a measure of how much rent a property generates.