Investment Terminology

A tax-deferred exchange that allows investors to sell a property and reinvest the proceeds in a like-kind property while deferring capital gains taxes. Strict timelines and rules apply.

The process of paying off a loan through regular payments over time. Each payment includes both principal and interest, with the interest portion decreasing and principal portion increasing over the loan term.

A professional assessment of a property's market value conducted by a licensed appraiser. Required by lenders to ensure the property is worth at least the loan amount.

Buy, Rehab, Rent, Refinance, Repeat. A strategy where investors purchase distressed properties, renovate them, rent them out, refinance to pull out equity, and use that capital to repeat the process.

A metric used to evaluate the potential return on a real estate investment, calculated by dividing the Net Operating Income (NOI) by the property's purchase price or current market value. Higher cap rates indicate higher potential returns but often come with higher risk.

The annual pre-tax cash flow divided by the total cash invested, expressed as a percentage. This metric shows the return on actual cash invested, not the total property value.

Fees and expenses paid at the closing of a real estate transaction, including loan origination fees, appraisal, title insurance, attorney fees, and recording fees. Typically 2-5% of the loan amount.

A financial ratio that measures a property's ability to cover its debt obligations. Calculated by dividing the property's Net Operating Income (NOI) by its total debt service (annual mortgage payments). A DSCR of 1.0 means the property generates exactly enough income to cover debt payments; lenders typically require 1.0-1.25 or higher.

The investigation and analysis period before purchasing a property, including inspections, financial review, title search, and market analysis. Typically 10-30 days in a purchase contract.

A neutral third party that holds funds and documents during a real estate transaction until all conditions are met. Also refers to an account where lenders collect monthly payments for property taxes and insurance.

A simple metric calculated by dividing the property price by the annual gross rental income. Used for quick property comparisons but doesn't account for expenses.

The total rental income collected before any deductions for expenses, vacancies, or other costs. Also called gross scheduled rent.

Living in one unit of a multi-family property while renting out the other units, or renting rooms in a single-family home. Allows investors to reduce or eliminate housing costs while building equity.

The percentage charged by a lender for borrowing money, expressed as an annual percentage. For investment property loans, rates are typically higher than primary residence rates due to increased risk.

A period at the beginning of a loan where borrowers only pay interest, not principal. This results in lower initial payments but no equity buildup during this period.

A metric that accounts for the time value of money, representing the annualized rate of return that makes the net present value of all cash flows equal to zero. Used to compare investments with different holding periods.

The ratio of a loan amount to the appraised value or purchase price of a property (whichever is lower). Expressed as a percentage, it indicates how much of the property's value is being financed. Lower LTV ratios typically result in better interest rates.

The rental rate a property could command in the current market based on comparable properties. Used to evaluate whether current rents are below market (opportunity) or at market.

A property that combines different uses, typically residential and commercial, in the same building or development. Common examples include apartments above retail stores.

A residential property with multiple separate housing units, such as duplexes, triplexes, fourplexes, or apartment buildings. Properties with 1-4 units qualify for residential financing; 5+ units require commercial loans.

The annual income generated by a property after deducting all operating expenses but before deducting mortgage payments and income taxes. NOI = Gross Rental Income - Operating Expenses.

Upfront fees paid to the lender at closing to reduce the interest rate on a loan. One point equals 1% of the loan amount. Paying points can lower your monthly payment but increases closing costs.

A fee charged by some lenders if you pay off your loan early, either through refinancing or selling the property. Common structures include step-down penalties (5-4-3-2-1) that decrease over time.

A fee paid to a property management company for handling day-to-day operations, typically 8-12% of gross rent for residential properties. Includes tenant placement, rent collection, and maintenance coordination.

A document listing all rental units in a property, current tenants, lease terms, rental rates, and payment status. Essential for evaluating income-producing properties.

A measure of the profitability of an investment, calculated as the gain from the investment minus the cost, divided by the cost. For real estate, this can include cash flow, appreciation, loan paydown, and tax benefits.

Properties rented for short periods, typically less than 30 days, through platforms like Airbnb or Vrbo. Can generate higher income than long-term rentals but require more active management.

A standalone residential property designed to house one family. SFRs are the most common type of investment property for individual investors due to their simplicity and broad tenant appeal.

Insurance that protects against losses from defects in the title, such as liens, encumbrances, or ownership disputes. Lender's title insurance is required; owner's title insurance is optional but recommended.

A fully renovated property that is ready to rent immediately, often sold with tenants already in place. Turnkey properties typically command premium prices but offer immediate cash flow.

The percentage of time a rental property is unoccupied and not generating income. Calculated as vacant days divided by total days in a period. Investors typically budget 5-10% for vacancy.

A strategy of purchasing properties below market value or with unrealized potential, making improvements, and increasing value through renovations, better management, or rent increases.