Below is a Real Estate Glossary that defines the key terms that investors should Know.
Accredited Investor: A type of real estate investor that is allowed to invest in riskier investments. The most common qualifications are having a $1M net worth or earning an income of $200,000 for 2 years in a row ($300,000 if married).
Acquisition Cost: The total cost of buying an investment property, including mortgage loan fees, closing costs, inspection fees, etc.
Adjustable-Rate Mortgage (ARM): A mortgage that does not have a fixed interest rate – that is, the interest rate fluctuates based on the benchmark interest rate.
After Repair Value (ARV): The value of a property after repairs and improvements have been made.
Amortization: Amortization refers to the amount of principal and interest paid each month over the course of the loan. Even though the mortgage repayment amount is the same each month, the amount going towards principal starts out small, with the majority of the payment going towards interest.
Annual Depreciation Allowance: This is the amount an investor is allowed to deduct or write off in taxes every year based on the depreciation of a property. It includes costs related to improving a rental property and is often distributed over the “useful life” of a property rather than as one big lump sum.
Anticipated Hold Period: This is the period of time that an investor anticipates holding each home before looking to liquidate the property. Financing terms are often matched to this hold period to optimize returns.
Appraisal: The process of determining the value of a property through an independent survey, often required by a lender in order to ensure the money being borrowed is a fair amount for the property.
Appraised Value: The appraised value of a property is determined by an independent survey conducted by a lender and is useful in determining how much money can be borrowed for its purchase, and under what terms.
Appreciation: A measure of the estimated increase in value of an asset over a certain time frame.
Building Classifications: Investment properties in the real estate market are divided into four classifications (A, B, C, and D) based on value, allowing investors to determine the value, risk, and profitability of a potential purchase. Class A properties are more expensive, in high-demand markets, and often newer builds.
Capital Expenditures (CapEx): Large, one-time expenses undertaken to extend the life or add value to a real estate property. These include renovations and upgrades, as well as equipment or supply costs needed to make the improvements.
Capital Gains Tax: Capital gains refer to the profit earned from the sale of a real estate investment. The amount of tax paid on this profit is termed capital gains tax.
Capitalization Rate (cap rate): The cap rate is the NOI divided by the purchase price. The cap rate is an indicator of the risk and return of a property. It tells you the return of an investment before financing costs.
Cash On Cash Return: The cash return on an investment compared to the amount of cash invested. For example, an investment with cash distributions of $50 on a $1,000 investment has a 5% cash on cash return.
Clear Title: A clear title is a property where there is no dispute over ownership and no lien from creditors.
Closing Costs: One-off expenses paid by the buyer during the purchase of a property. These include application fees, appraisal costs, attorney fees, closing and courier fees, homeowners insurance, property taxes, mortgage insurance premiums, and underwriting fees.
Comparables / Comparative Market Analysis (CMA): An analysis done to compare similar properties in the same market with the goal of understanding the value of the property and the rent that can be charged.
Commercial Real Estate: Commercial real estate is the purchase and sale of commercial properties, such as office buildings, retail centers, industrial properties, or land to be developed into a commercial project in the future.
Debt-to-Equity Ratio (D/E): A ratio that shows how much of a property an investor owns versus how much is owed on the mortgage. This is an important measure of ownership in a property.
Debt-to-Income Ratio (DR, D:I): This ratio is used to measure a borrower’s ability to pay back the loan. It compares the monthly minimum debt payment to the borrower’s monthly income.
Depreciation: The loss of value of a property over time due to wear and tear.
Diversification: The process of investing in different investments to reduce a portfolio’s overall risk.
Dividend Yield: A ratio of annual target cash distributions per share divided by the price per share. Alternatively it is a ratio of the total cash distributions divided by the property purchase price.
Earnest Money: Earnest money, also known as a good faith deposit, is the amount of money put down by a buyer to express their intention of buying a home. It is often applied to the down payment of the home.
Effective Gross Income (EGI): The Effective Gross Income or EGI is the measure of the potential positive monthly cash flow a rental property can produce. It is the Potential Gross Rental Income (plus any other income) minus expenses and vacancy.
Equity: Equity is the difference between the current market value of a property and how much you owe on the mortgage. If you sell a property, the equity is your profit in cash after you’ve paid off the mortgage.
Escrow: An escrow is a third-party financial account that holds funds, such as earnest money, or documents while the buyer and seller are in negotiations. For instance, when you buy a home, you’ll pay a down payment for the purchase, and this money will be held by an impartial third party until the contract is signed and the deal closed.
Fair Housing Act: The Fair Housing Act is a law that prohibits discrimination against people based on race, color, sexual orientation, nationality, religion, disability, and family by anyone who has an influence in the decision-making process of buying, selling, renting, or financing of housing. This includes real estate brokers, landlords, and sellers.
FHA Financing: A type of loan that is issued by the FHA (Federal Housing Administration). The down payment required for these types of loans is a lot lower than conventional loans, typically between 3-5 percent of the home value.
Financing: The percentage of the property Purchase Price that will be funded through long-term bank financing.
Fixed-Rate Mortgage: A type of mortgage that has a set or a fixed interest rate that stays constant throughout the term of the loan. Since the mortgage amount remains the same through the term of the loan, a fixed-rate mortgage can help more accurately predict the return on an investment.
Flipping: The process of buying a property, fixing it up or renovating it to increase its market value, and selling it for a profit.
FMV (Fair Market Value): The Fair Market Value of a property is what a property would reasonably sell for in the open market without undue pressure to complete a transaction. The FMV of a property allows buyers to ascertain whether they’re paying the right price and sellers to know if they’re leaving money on the table.
FRBO (For Rent by Owner): This is a property that is being rented directly by the owner, without the involvement of a real estate management company.
FSBO (For Sale by Owner): This is a property that is being sold directly by an owner, without the involvement of a real estate agent or realtor.
Gross Rent Multiplier (GRM): The ratio of the price of a rental property to its gross rental income before expenses. The GRM is a metric that helps to calculate how many years it would take an investment to pay for itself based on the gross rental income received.
Gross Rental Income (GRI): The total amount of money collected in rent plus fees, including parking fees, pet fees, advance rent, and others.
Gross Rental Yield: The total income generated by a property divided by the price paid for the property plus any associated costs. Gross Rental Yield = (Monthly rent x 12) ÷ (Purchase price + closing costs)
HOA Fees: When you buy a property in a homeowners association or HOA, you become a member in the HOA and are required to pay monthly HOA fees for the maintenance of the properties within the association.
Income-Producing Assets: Real estate investments that create passive income for the property owner.
Inflation: Inflation is simply the rate at which the price of goods and services rises over a period of time. As inflation increases, if your money is in cash or an asset that doesnt increase with the inflation rate, your purchasing power decreases. Real estate investments are a great way to protect against inflation, you can learn more here.
Inspection Contingency: An inspection contingency is a clause put in the agreement to allow the buyer to have the home inspected and negotiate costs or terminate the agreement with the seller based on the results of the inspection.
Internal Rate of Return (IRR): This is the best measure of a property’s performance, used to measure an asset’s long-term profitability. It is defined as the point where the net value of the expenses equals the gross rental income.
Leverage: Leverage is using a loan to invest into real estate. It has the effect of amplifying returns or losses.
Loan Origination Fee: A one-time fee, typically between 0.5% and 1%, that is charged by a lender to process a new mortgage application.
Loan-to-Value Ratio (LTV): The loan-to-value ratio is an important calculation to determine the amount of the loan compared to the value of the property. (LTV = Mortgage amount ÷ appraised property value or sale price)
Long-Term Rental: A type of rental property where the tenant signs a lease for a longer-term period, typically a year.
Management Fee: The Management Fee is an operating expense paid to the operator to cover costs of managing the property operations, like annual accounting, audit, and tax filings.
Mixed-Use Building: A mixed-use building is a property that’s been zoned for both personal and commercial purposes, such as a family home where the ground floor is a convenience store.
Mortgage: A mortgage is the sum of money borrowed from a lender, such as a bank, to purchase a property. Though it can be higher, a mortgage is frequently given for up to 80% of the property’s value.
Mortgage Insurance Premium (MIP): In order to minimize the risk for a lender, if you’re purchasing a property with less than a 20% down payment, you will be required to take out mortgage insurance. The type of insurance you’ll pay will depend on the type of loan you have. For a conventional loan, you’ll have PMI (Private Mortgage Insurance) and for an FHA loan, you’ll have MIP.
Multi-Family Home: A multi-family home is a type of residential property, such as an apartment complex, condominium, or a duplex, that has more than one residential unit.
Net Cash Flow: This is the Target Cash Flow that will be available to distribute to investors through dividend payments. Net Cash Flow = Rent Payments – Operating Expenses.
Net Operating Income (NOI): Net Operating Income (NOI) is the gross profit of a rental property. It’s calculated as gross rents – all expenses other than interest.
Net Yield: The net yield is the annual profit (income minus costs) generated by any asset divided by its price. In real estate terms, the net yield provides an assessment of the return that you’ll get from a property after all expenses have been deducted.
Operating Expenses: Operating Expenses include all of the anticipated costs for operating the rental property. Some expenses include Insurance, Property Tax, Vacancy, Maintenance, and Property Management.
Pass-Through Taxation: The process in which a company that does not pay a corporate income tax passes all of its earnings to its owners. The owners then pay taxes on the company income. This is also called single taxation.
PMI (Private Mortgage Insurance): In order to minimize the risk for a lender, if you’re purchasing a property with less than a 20% down payment, you will be required to take out mortgage insurance. The type of insurance you’ll pay will depend on the type of loan you have. For a conventional loan, you’ll have PMI and for an FHA loan, you’ll have a Mortgage Insurance Premium (MIP).
Portfolio: A variety of investments and assets.
Principal: The principal is the amount of money owed on a loan or mortgage, not including the interest.
Principal Reduction: A principal reduction is a decrease in the amount owed on a mortgage. It’s an alternative to a home foreclosure, sometimes offered by lenders as financial relief to homeowners who can no longer afford their mortgage.
Pro-forma: A pro-forma is the estimated financials for an investment. Pro-formas combine known revenue and expenses with estimates to create reasonable financial projections.
Projected Annual Appreciation: This is a projection of the potential increase in value for the property typically based on 3rd party valuation tools.
Property Management: A company that’s paid for by a landlord to oversee the day-to-day repairs, management, and administrative tasks on an investment property.
Purchase Agreement: The legal contract that outlines all the terms and conditions of the sale of a property.
Real Estate Owned (REO): An REO property is one that’s been foreclosed on by a bank that held the mortgage and that is now owned by that bank. REO properties are often resold below market value.
Rehabilitation: Repairs and renovations that need to be completed on an investment property to prepare it for resale or make it tenant-ready.
REIT: A Real Estate Investment Trust (REIT) is a type of company that is designed to invest in real estate. REITs get special tax advantages as long as they adhere to strict requirements.
Remote Investing: A type of real investment investment in which investors buy properties outside of their immediate geographical area. These properties are often managed by a property management company.
Rental Income: Income generated from leasing out a property to tenants who pay to live in it for the term of the lease.
Retail Investors: Retail investors are individual or small investors who invest in property for their personal accounts as opposed to institutional investors, who generally invest significantly larger amounts on behalf of institutions, for instance, fund managers or private equity firms.
Return on Investment (ROI): The percentage of invested money that’s made back after subtracting all expenses and costs. (ROI = Investment Gain – Investment Cost) ÷ Investment Cost
RTO (Rent to Own): Rent to own is a combination of a rental and purchase agreement. With an RTO, the tenant’s monthly payment to the landlord is divided up in a way that part of it goes towards the monthly rent and the remainder towards the purchase price of the house as set out in the agreement. (Sometimes also referred to as Lease-to-Purchase.)
Self Directed IRA (SDIRA): A Self-Directed IRA or retirement account is similar to a traditional IRA with one key difference: in addition to stocks and bonds, an SDIRA can also be used to invest in the real estate industry. Any returns from this type of investment are tax-deferred and must be deposited back into the IRA.
Series LLC: The series LLC refers to the specific offering that is being put up for sale and that owns the property. Each property is purchased and placed in an LLC for liability and tax purposes.
Short Sale: When the property is sold for less than what is owed on the mortgage. All the proceeds of this real estate transaction go to the lender.
Short-Term Rental: This is a type of property that is leased out for very short periods of time, typically through marketplaces such as Airbnb. Often used by vacationers, the properties are furnished with listed amenities.
Single-Family: A type of rental property that is designed for just 1 family to live in. This can be a typical house or townhouse. Duplexes and apartment buildings are considered to be “multi-family” housing because the property can house multiple families.
Systematic Risk: The risk of an individual investment. This risk can be reduced through proper diversification.
Tenant Screening: The process of vetting tenants. This typically involves doing due diligence through interviews, background and credit checks, and calling references.
Title Insurance: Title insurance is a type of indemnity insurance. It’s taken out to protect both lenders and homebuyers from financial loss resulting from defects in a title to a property, such as back taxes, liens, and conflicting wills.
Total Return: An annualized return for equity investments that includes cash distributions, appreciation, financing percent, and overall expenses.
Turnkey (also Turn Key) Property: A rent-ready property, that is, an investment property that does not require any repairs or renovations to rent out to tenants and is updated to current market standards.
Underwriting: Underwriting is a process through which a lender verifies the borrower’s ability to make the loan payments. This is done through checks on income, assets, debt, and property details.
Vacancy Provision: Money that’s put aside by an investor to cover expenses in the event that a rental property sits vacant for a period of time.
Vacancy Rate: Vacancy rate is the percentage of all units in a rental property portfolio that are vacant, that is, have no occupancy at any given time.
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