For full lessons and complete training courses, visit our website at Evergreen Capital - http://www.evergreencapitaladvisors.com/training/ FORMULAS: 1. LTV = Loan Amount / Value 2. CLTV = Total Amount of All Loans / Value Loan to Value (LTV) LTV is a metric used by most lenders and the market to indicate on a percentage basis how much leverage or debt a property has on it relative to its total value. So here's the formula. It's pretty simple. Loan amount divided by the property value. Or in the case of an acquisition, it would just be the loan amount divided by the purchase price. Here's an example. Imagine you have a property with a value of $1 million and you're getting a loan for, say, 600,000. That would indicate that the loan divided by the property value is an LTV of 60%. Most lenders use LTV as a limit as to how much they will lend against a property when either buying or refinancing. So in investment real estate, typically we see maximum LTVs in the 70 to 80% range, which means that the total amount of the loan relative to the value cannot exceed 70, 75, 80% depending on what that lender's particular limit is. In addition to LTV that we calculate, there's also another term that's related to it called CLTV, which is the cumulative or combined loan to value. An example there would be taking this previous situation, imagine we have a $600,000 first mortgage and then another second mortgage for, say, $150,000. That would be a 15% LTV and the total combined CLTV would be 75%. $750,000 divided by $1 million, cumulative combined LTV of 75%. So LTV is very commonly used throughout the industry. It's important to note that lenders always have a max LTV that they will allow for leverage or debt to be placed on a property. So understanding that prior to acquisition can be very important. This has been a quick overview of Loan to Value. Thanks for watching. See also: Promissory Notes Adjustable Rate Mortgage

Risk and Reward For full lessons and complete training courses, visit our website at Evergreen Capital - http://www.evergreencapitaladvisors.com/training/ Frequently, my students will ask me about risk, or how risky a particular investment is, and also how to evaluate risk. And it can be a tricky one to understand, but the basic concept is risk is the amount of variation in results that you might get if you had invested in a similar investment many, many different times, would you get the exact same performance and the exact same desired return every time? Or would it be wildly variable? The more variable your potential results are, the more risk you're undertaking. Let's take a look at that graphically. The first thing is what we like to call the Band of Investments, and over here, if you have what is considered risk-free, or very low risk, such as treasury bills or other guaranteed investments, these are going to be considered low risk. And on the other end, you have high risk. In today's world, probably cryptocurrencies, junk-bonds, those would be the high risk types of investments, where you don't really know what's going to happen. And somewhere in the middle, we have real estate. Now let's take a look at how risk looks like when it's quantified. Imagine this graph represents your target results. In other words, zero would mean no variation from what you expected. It didn't perform more positively or more negatively than you expected. You got exactly the return that you wanted. Imagine you're investing in treasury bills. There's going to be no variation whatsoever. If you invested in t-bills a hundred times, you would see no variation in your results. Now, let's look at the other end on a higher risk investment. A higher risk investment, if you invested in that same thing multiple times, depending on when, or how, how much, what time of the market you were getting into that investment, you may see extremely positive results, you may see results kind of around what you expected. You could end up seeing highly negative results. The point is that risk means a greater standard deviation in your potential results. The lower the standard deviation, or if there's no standard deviation, that would be risk-free. If there is wide standard deviation in your potential results, that would be high risk. Risk comes with a premium. So anytime that you are looking at an investment, and you are taking on more risk, then you should be taking on more reward. That's why you will see target returns for things like treasury bills, which have virtually no risk, will be very low. They won't have a premium attached to them, but real estate, maybe lower-rated investments, or other investments, they're going to be more risky, and therefore, investors are going to demand that they get a premium reward for taking on more risk. This concept holds true throughout the world, it's not just related to t-bills, or real estate, or others, but it works for stocks, or development projects. Just know that risk and reward are correlated, and the higher the risk, the higher the return that an investor is going to require. This has been a quick overview on risk. I'm Trevor Calton, thanks for watching.

For full lessons and complete training courses, visit our website at Evergreen Capital - https://www.evergreen.llc/training/ Amortization is the term for paying down the cost of an asset at a certain rate. In the real estate world, typically when we're referring to amortization we are referring to the rate at which we are repaying the principal on a loan back to the lender. Let's take a look at this graphically. Imagine that we have our loan amount and time, let's say this is 30 years. If a loan is fully amortizing, it is paid off down to zero at the end of the life of the loan. It starts out at whatever the loan amount is and a fully amortizing loan is paid completely off. The most common example of a fully amortizing loan would be your standard 30 year fixed rate home loan. You have an equal payment that goes every month for the entire life of the loan and at the very last payment the loan balance is zero. Sometimes we have what's called a partially amortizing loan and that would be when the loan is paid down but not all the way. In the case of a partially amortizing loan, we end up with a balloon payment. Typically when you find a partially amortizing loan it is often because payments are amortized over say 25 or 30 years, but the term of the loan is shorter and we have a balloon payment say after maybe 10 or 15 years. The next type of structure is no amortization. In other words, not paying any principal at all, we're simply paying interest only. The loan balance at the beginning of the loan never changes, it stays constant throughout the life of the loan because payments are only made to cover interest and not paying down any principal. Finally, sometimes we run into what we call negative amortization. Typically negative amortization occurs when payments are not sufficient to cover even the interest that has accrued each month or each period and any unpaid interest is capitalized onto the balance, thereby increasing the loan amount and the loan balance over time. This has been a quick overview of amortization. Thanks for watching.

Loan Constant is a financial term, somewhat related to Cap Rates and Cash on Cash, in that it indicates on a percentage basis the cash return to the lender relative to the outstanding loan balance. Constant basically tells us how much principle and interest is being paid back to the lender divided by the loan amount. Let's take a look at the formula and I'll run through a couple examples. Loan Constant or K, as it's abbreviated, is simply the annual debt service divided by the loan balance. Let's take a look at an example. Imagine we have a one million dollar loan at, say, 6% per year amortized over 30 years. In this case, our annual debt service would be approximately $72,000 a year. Divided by a million dollars, that comes to a constant of 7.2%. If that same loan were amortized over just, say, 25 years and our annual debt service would be about $77,000 or a 7.7 constant. Of course, if the interest rate went up to, say, 7% over 25 years, then our debt service would be in the $84,000 range or an 8.4% constant. Lender's return, cash-on-cash return to the lender, changes depending on the terms of the loan that is written. Lenders that want to recoup cash more quickly can charge 100% interest rate or shorten their amortization in order to do so. This has been a quick overview of loan constants and thank you for watching. For full lessons and complete training courses, visit our website at Evergreen Capital - http://www.evergreencapitaladvisors.com/training/

For full lessons and complete training courses, visit our website at Evergreen Capital - http://www.evergreencapitaladvisors.com/training/ Gross Rent Multiplier FORMULA: GRM = Price / Schedule Gross Annual Rents The gross rent multiplier is a pretty simple metric that just says the price divided by the annual gross rents. So in other words, if we had a million dollar property and gross rents were $100,000.00 then we would have a GRM of 10. One thing to note here is that the GRM only tells us the price relative to the gross income. It doesn't account for expenses and has no relation to the net income. So if expenses go up or down, the GRM won't change. It only changes with the rising or falling of the gross income. Gross rent multiplier is not typically used very often, certainly not in valuation, but it is just another metric that allows investors to compare one property's price to it's gross income versus another. A more accurate metric to use when evaluating properties would be caprate, or in the case of a leveraged acquisition, the cash on cash return. This has been a quick overview gross rent multiplier. Thank you for watching.

Debt service coverage ratio determines the maximum loan payment based on a property's income, thereby also determining the maximum loan amount. DSCR FORMULAS: 1. Debt Service Coverage Ratio = NOI / Debt Service 2. Maximum Annual Debt Service = NOI / DSCR Example: $100,000 NOI / 1.25 DSCR = $80,000 Max Debt Service Debt Service Coverage Ratio - DSCR is an underwriting term used by lenders that effectively sets a minimum for the amount of net operating income available to cover the debt service. The ratio is often set right around 1.25, sometimes it's 1.2, sometimes it is 1.3, depends on the industry, the market, the market timing, and the product type. Debt Service Coverage Ratio tells us how much extra cushion we need to have in our net operating income over the debt service or the annual loan payments. In this case, a 1.25 debt service coverage ratio means that the NOI needs to be 125%, or 1.25 times the amount of the annual loan payments. Debt service coverage ratio sets a limit on how much risk the lender's going to take in terms of what they loan compared to the cash flow on the property. They don't want to put borrowers in a position where they have barely enough net income to cover the debt service or, even worse, not enough net income, so the debt service coverage ratio builds in the amount of cushion that they want. Lenders can adjust this for competitive reasons, or market reasons, but it typically is about .25 over the debt service amount. Let's take a look at an example. Imagine a property has $100,000 of net operating income. If we look at our formula, if 1.25 is our minimum ratio, that means that 1.25 equals 100,000 divided by X, would make X = 80,000. This makes $80,000 our maximum annual debt service. We take that number, we divide it by 12, and we know that our maximum monthly loan payment is going to be $6667. Understanding this, if the debt service coverage ratio dictates what our maximum loan payment can be then one thing that we need to recognize that our debt service amount that is allowed by the lender is capped at $6667. If interest rates go up the payment cannot go up beyond that, so if interest rates rise then the loan amount would have to go down in order for us to stay within the minimum required debt for service coverage ratio. Let's look at the numbers behind that. If we've already determined that our debt service coverage ratio is a minimum of 1.25, and we have $100,000 in net income then we know that X, which in this case would be $80,000, is our maximum debt service per year, or $6667 per month. Let me show you how this would be calculated in the face of changing interest rates, or perhaps a shorter amortization period. I'm going to lay this out the way we would lay it out in a financial calculator. If you haven't taken that lesson yet just check out our other videos on financial calculators, and calculating debt service, present value, et cetera. Let's imagine we're punching this into our financial calculator. In this example, I'm going to use a 30 year fixed loan with monthly payments at 6% fully amortizing. Here's what we've determined, we've determined that our maximum loan payment each month can only be $6667. If we have a 6% interest rate, and we're doing a 30 year, or 360 month, amortization we get a $1,112,000 maximum potential low. Typically, if our net operating income is fixed then our maximum loan payment is also fixed. If interest rates, in this case, should go up to 7% still amortized over 30 years, and knowing that our payment can't go up this would bring our maximum loan amount to $1 million. Similarly, if we still had a 7% interest rate, but our amortization was shortened to, say, 25 years, or 300 months, and our payments still capped at $6667 then our loan amount would be reduced even further to $943,000. Debt service coverage ratio, again, tells us what the percentage of the net operating income over the annual debt service needs to be. As we can see, annual debt service can be affected by both interest rates, and amortization. Most importantly, what we need to remember here is debt service coverage ratio lets us know how much extra net operating income we have over our loan payments. For full lessons and complete training courses, visit our website at Evergreen Capital - http://www.evergreencapitaladvisors.com/training/

For full lessons and complete training courses, visit our website at Evergreen Capital - http://www.evergreencapitaladvisors.com/training/ Subordination is when the claim of one creditor to a real estate asset is subordinated, or made junior to, the claim of another. This is pretty common, especially in the case of refinancing debt. So let's talk about it, and I'll show you how it works. Imagine this is your timeline. And, here we have Year 0, or the day of acquisition. And on this date we have senior debt placed on the property. As we know, claims to any real estate are prioritized in chronological order as to when they were made against the property, and recorded on the title. So when we have senior debt on a property, if we go ahead and a little while later, we add some junior debt, the junior debt is subordinate to the senior debt, in that its claim on the title was made after the senior debt. Then what happens if the senior debt refinances and a new loan is placed on after the junior debt? So imagine that this debt goes away, and now we have this debt. Well if this is the senior debt, or the primary loan on the property, if it was made chronologically after the junior debt, then technically it would not have priority over the junior debt, it would be subordinate. So in this case, typically senior debt holders will require that the junior debt holders sign what's called a subordination agreement. And subordination agreements effectively say we as the junior debt holder agree to subordinate behind whoever is executing the subordination agreement. So effectively what would happen is, the junior debt holders claim would now be subordinated behind the senior debt. So that in the event of foreclosure, the senior debt holder would be paid back first, and then if there are excess funds leftover, then that junior debt holder would get paid. This has been a quick overview of subordination, thanks for watching.

Cash on cash return is a real estate term related to cap rates, but accounts for leverage when determining an investor's actual return on investment. Cash on cash return takes into account the fact that investors typically use part down payment and part loan in order to buy a piece of real estate. So, cash on cash return really tells us the return on investment to the investor after accounting for leverage. Let's take a look at the formulas, and then we'll work through it and see how it's related. 1. Cash-on-Cash Return = Net Cash Flow / Down Payment 2. Net Cash Flow = Net Operating Income - Debt Service 3. Down Payment = Purchase Price - Loan Amount Cash on cash return, often expressed as C over C, is simply our net cash flow after debt service divided by the down payment. We arrive at this formula by extrapolating it from another formula. So let's take a look at it. It's actually our net operating income minus our debt service, over our value, or purchase price, minus our loan amount. Imagine here we have $80,000 of net operating income and we have $45,000 in annual debt service. That gives us $35,000 of net cash flow. If our purchase price was a million and we leveraged 750,000 of that, then our down payment would be 250,000. So our net cash flow divided by our down payment would equal approximately 14%.