Real Estate Investor Terms & Definitions

Real estate investors speak a language all their own. This list will provide you with the vocabulary you need to understand so you can speak that language.

1031 Exchange: A provision in the U.S. tax code that allows investors to defer capital gains tax by reinvesting the proceeds from the sale of one investment property into another.

20% Rule: A guideline for rental property investors that suggests aiming for a minimum of 20% cash-on-cash return on investment to ensure profitability.

50% Rule: A guideline used in real estate investing that states that roughly 50% of gross rental income will be used for operating expenses, excluding mortgage payments.

70% Rule: A rule of thumb in fix-and-flip investing that an investor should pay 70% or less of the after-repair value (ARV) of a property minus the estimated repair costs.

Absorption rate: The rate at which available properties are sold or leased in a specific market during a given time period.

Adjustable-rate mortgage (ARM): A mortgage with an interest rate that can fluctuate over time based on market conditions.

ADU (Accessory Dwelling Unit): A secondary living unit on a property that is self-contained and provides independent living quarters, such as a guest house or an apartment over a garage.

Amenity: A feature or benefit of a property that enhances its value or appeal, such as a swimming pool, gym, or park.

Amenity-rich: Refers to a property or location that offers a wide range of desirable amenities, such as parks, schools, shopping centers, and recreational facilities.

Amortization: The process of gradually paying off a loan through regular payments, which includes both interest and principal.

Appraisal: An evaluation of a property’s value conducted by a licensed appraiser to determine its market worth.

Appreciation: The increase in the value of a property over time.

ARM (Adjustable-rate Mortgage) reset: The point in time when the interest rate on an adjustable-rate mortgage adjusts based on the terms of the loan agreement.

ARV (After-Repair Value): The estimated value of a property after it has been renovated or repaired.

Assessed value: The value of a property determined by a government tax assessor for the purpose of calculating property taxes.

Assignment: The transfer of a contract or agreement, such as a purchase contract, from one party to another.

Balloon payment: A large, lump-sum payment that is due at the end of a specific loan term, typically for real estate financing. Unlike traditional loans with fixed monthly payments that fully amortize over the loan term, a balloon payment loan has lower regular monthly payments, but the remaining balance becomes due in full as a single payment at the end of the loan term.

Bridge loan: A type of short-term loan that provides the financial solution for individuals who need to cover the period between buying a new property and selling their current one.

BRRRR Strategy: Acronym for Buy, Rehab, Rent, Refinance, Repeat. A strategy used by investors to acquire properties, renovate them, rent them out, refinance to pull out equity, and then repeat the process with the funds obtained.

Buyer’s market: A buyer-friendly market occurs when the number of properties available for sale surpasses the number of buyers, thus giving buyers the upper hand in negotiations.

Cap rate compression: The phenomenon where cap rates decrease, often due to increased demand for properties or declining interest rates, resulting in higher property valuations.

Capital expenditure (CapEx): The cost of significant improvements or renovations made to a property, such as replacing a roof or upgrading HVAC systems.

Capitalization rate (Cap rate): A measure used to evaluate the potential return on an investment property by dividing the net operating income (NOI) by the purchase price.

Carrying costs: The ongoing expenses associated with owning a property, such as mortgage payments, property taxes, insurance, utilities, and maintenance costs.

Cash flow: The income generated from a real estate investment after deducting expenses.

Cash-on-cash return: The annual cash flow from a property divided by the initial cash investment, expressed as a percentage.

Cash-out refinance: The process of refinancing a mortgage to access the equity in a property and receive cash.

Certificate of Occupancy (CO): A document issued by a local government authority that certifies a property meets building codes and is safe for occupancy.

Commercial real estate: Real estate properties used for business or investment purposes, such as office buildings, retail centers, industrial facilities, and apartment complexes.

Comparative Market Analysis (CMA): An evaluation of similar recently sold properties in the area to determine the market value of a property.

Conforming loan: A mortgage loan that meets the guidelines set by government-sponsored enterprises (GSEs) like Fannie Mae and Freddie Mac, allowing for more favorable terms and interest rates.

Contingency: A condition or provision in a contract that must be satisfied for the contract to be binding, such as a satisfactory home inspection or mortgage approval.

Cost approach: An appraisal method that estimates the value of a property by assessing the cost of replacing or reproducing the property, minus any depreciation.

Crowdfunding: The practice of raising funds from a large number of individuals, often through online platforms, to finance a real estate project.

Debt-to-income (DTI) ratio: a financial metric used by lenders to assess an individual’s or a borrower’s ability to manage debt and repay new loans. It compares the borrower’s total monthly debt obligations to their gross monthly income, expressed as a percentage. The formula to calculate DTI is as follows: DTI = (Total Monthly Debt Payments) / (Gross Monthly Income) x 100

Debt service: The monthly mortgage payment made by the borrower to repay the loan.

Deed: Legal document that facilitates the transfer of property ownership between two parties.

Depreciation recapture: The recapture of previously claimed depreciation deductions when a property is sold, resulting in potential tax consequences.

Depreciation: The decrease in the value of a property over time due to wear and tear or market conditions. In real estate investing, depreciation can also have tax benefits.

Distressed property: A property that is in poor physical condition, facing financial difficulties, or under foreclosure.

Diversification: The strategy of spreading investments across different asset classes or markets to reduce risk and increase the potential for returns.

Down payment: The upfront payment made by a buyer toward the purchase price of a property.

Due diligence: The process of conducting a thorough investigation of a property before completing a purchase, including inspections, financial analysis, and legal review.

Due-on-sale clause: A provision in a mortgage or deed of trust that allows the lender to demand full repayment of the loan if the property is sold or transferred to another party.

Easement: The right granted to another party to use a portion of a property for a specific purpose, such as a utility company having access to underground pipes.

Eminent domain: The power of the government to seize private property for public use, provided that just compensation is paid to the property owner.

Equity: The portion of a property’s value that the owner actually owns, calculated as the difference between the property’s market value and any outstanding mortgage balance.

Escrow: A neutral third-party account where funds, documents, or other assets are held until all conditions of a contract are met.

Fair Market Value (FMV): The price at which a property would sell between a willing buyer and a willing seller, both having reasonable knowledge of the property and no undue pressure to buy or sell.

Feasibility study: An analysis conducted to determine the viability and profitability of a real estate project, taking into account factors such as costs, market demand, and potential returns.

Fix and flip: The strategy of purchasing a property in need of repairs, renovating it, and quickly selling it for a profit.

Fixed-rate mortgage: A mortgage with a fixed interest rate for the entire duration of the loan. The rate will not change, regardless of any fluctuations in the market or economy. This provides borrowers with stability and predictability in their monthly mortgage payments.

Flipping: The practice of purchasing a property with the intention of renovating or improving it and selling it quickly for a profit.

Gross Rent Multiplier (GRM): A ratio used to estimate the value of an investment property by dividing the purchase price by the property’s gross rental income.

Hard money loan: A short-term, high-interest loan typically used by real estate investors to finance the purchase and renovation of properties.

Homeowners Association (HOA): An organization in a planned community or condominium complex that establishes and enforces rules, manages common areas, and collects dues from homeowners.

Inflation: The increase in the general price level of goods and services over time, which can affect the value of real estate investments.

Joint venture (JV): A partnership or collaboration between two or more parties for a specific real estate project or investment.

Leverage: The use of borrowed funds (such as a mortgage) to finance an investment.

Liabilities: Debts or financial obligations owed by an individual or entity, such as mortgages, loans, or outstanding bills.

Listing: A property that is actively being marketed for sale or lease by a real estate agent or broker.

Loan-to-Value (LTV) ratio: The ratio of the loan amount to the appraised value or purchase price of a property, expressed as a percentage.

Market rent: The current rental rate for comparable properties in a specific market or area.

Master lease: A lease agreement in which a tenant leases a property from the owner and then subleases it to other tenants.

Multiple Listing Service (MLS): A database used by real estate agents and brokers to share property listings and cooperate in buying and selling properties.

Negative cash flow: When the expenses of owning a property, such as mortgage payments, maintenance costs, and taxes, exceed the rental income.

Net Operating Income (NOI): The total income generated by a property minus operating expenses (excluding mortgage payments and income taxes).

Non-recourse loan: A type of loan in which the lender’s sole recourse for repayment is the collateralized property itself, protecting the borrower’s other assets.

Offer: A proposal or bid made by a buyer to purchase a property at a specific price and under certain terms and conditions.

Off-market property: A property that is not actively listed for sale on the open market but may still be available for purchase.

Pre-approval: The process of obtaining a lender’s preliminary commitment to provide a loan, based on an evaluation of the borrower’s creditworthiness and financial information.

Private money: Funds provided by private individuals or companies, often used by real estate investors as an alternative to traditional bank financing.

Pro forma: A financial projection or analysis that estimates the potential income, expenses, and returns of a real estate investment.

Property management: The professional management of rental properties, including tasks such as tenant screening, rent collection, and property maintenance.

Quitclaim deed: A legal document used to transfer a person’s interest or claim to a property without providing any warranties or guarantees of ownership.

Real Estate Investment Trust (REIT): A company that owns, operates, or finances income-generating real estate, often allowing investors to buy shares and benefit from rental income and property appreciation.

Real estate owned (REO): A property that has been acquired by a lender through foreclosure and is now owned by the bank or financial institution.

Rental application: A form completed by prospective tenants that provides information about their background, income, employment, and references.

Rental property analysis: The evaluation of a potential investment property’s income potential, expenses, and overall viability as a rental.

Rental yield: The annual income generated by a rental property expressed as a percentage of its value.

Rent-to-own: A lease agreement that includes an option for the tenant to purchase the property at a predetermined price within a specified timeframe.

Return on Investment (ROI): The profitability of an investment property, expressed as a percentage of the initial investment.

Seller’s market: A market condition where there are more buyers than there are properties available for sale, giving sellers an advantage in negotiations.

Short sale: A real estate transaction in which the lender agrees to accept less than the outstanding mortgage balance to facilitate the sale of the property.

Title: A legal document that establishes ownership of a property and provides details about any liens, encumbrances, or other claims against the property.

Turnkey property: A fully renovated or refurbished property that is ready for immediate occupancy or rental, requiring minimal or no additional work.

Underwriting: The process of evaluating a borrower’s creditworthiness and the risks associated with a real estate loan application.

Vacancy rate: The percentage of rental units that are unoccupied in a given area or property.

Walkthrough: A final inspection of a property conducted by the buyer just before the closing to ensure that any agreed-upon repairs or changes have been made.

Wholesaling real estate: The practice of finding deeply discounted properties and assigning the purchase contract to another buyer for a fee, without actually taking ownership of the property.

Interested in investing in real estate in Metro Atlanta? Kurzner Group focuses on helping real estate investors, from first-timers to multi-billion dollar corporations. Contact us to get started investing.

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