Real Estate Investing Glossary

A tax-deferral strategy under IRS Section 1031 that allows an investor to sell one investment property and reinvest the proceeds into a like-kind property while deferring capital gains taxes. Strict timelines apply: 45 days to identify replacement property and 180 days to close.

An individual with annual income exceeding $200,000 ($300,000 with spouse) for the past two years, or a net worth exceeding $1 million excluding their primary residence. Accredited investors can participate in private placements and syndications that are not available to the general public.

The estimated market value of a property after all renovations and repairs are completed. ARV is critical for fix-and-flip analysis and the BRRRR strategy, typically determined by comparable sales of renovated properties in the same area.

The process of paying off a loan through regular payments over time, where each payment covers both interest and principal. Early payments are mostly interest, while later payments are mostly principal. A 30-year amortization schedule is standard for most residential investment properties.

An investment strategy standing for Buy, Rehab, Rent, Refinance, Repeat. The investor purchases a distressed property below market value, renovates it, rents it out, refinances based on the higher after-repair value to pull out most or all of the invested capital, and repeats the process.

A short-term loan (typically 6-24 months) used to finance property acquisition or renovation before securing permanent financing. Bridge loans have higher interest rates but faster closings and more flexible underwriting than conventional loans.

A measure of investment return calculated as Net Operating Income divided by the property's purchase price or current market value. A property generating $24,000 NOI purchased for $300,000 has an 8% cap rate. Lower cap rates generally indicate lower risk and higher-value markets.

The annual pre-tax cash flow divided by the total cash invested. If you invest $60,000 total cash and receive $6,000 in annual cash flow, your CoC return is 10%. Unlike cap rate, CoC accounts for the impact of financing and is generally a better measure of actual investor returns.

An IRS-approved tax strategy that accelerates depreciation deductions by reclassifying building components into shorter depreciation categories (5, 7, or 15 years instead of 27.5 or 39 years). A cost segregation study can generate significant tax deductions in the first years of ownership.

A ratio comparing a property's gross rental income to its total debt service (principal, interest, taxes, insurance, and HOA). Calculated as Monthly Rent / Monthly PITIA. A DSCR of 1.25 means the property generates 25% more income than needed to cover the debt payment. Also used as the basis for a popular non-QM loan type.

A non-cash tax deduction that allows property owners to deduct the cost of the building (not land) over its useful life. Residential properties are depreciated over 27.5 years, commercial over 39 years. Depreciation often creates paper losses that offset rental income for tax purposes.

The investigation and analysis an investor conducts before acquiring a property or entering an investment. Includes property inspection, title search, environmental assessments, financial analysis, market research, and tenant/lease review. In syndications, it also covers sponsor evaluation.

The difference between a property's market value and the outstanding mortgage balance. Equity increases through principal paydown, appreciation, and forced appreciation via renovations. Equity can be accessed through cash-out refinancing or a home equity line of credit.

The increase in property value resulting from improvements, better management, or increased income, as opposed to natural market appreciation. In multifamily and commercial properties, forced appreciation is achieved by increasing NOI, which directly increases the property value at a given cap rate.

A quick valuation metric calculated as the property price divided by the annual gross rent. A property selling for $200,000 with annual rent of $24,000 has a GRM of 8.3. Lower GRM generally indicates better cash flow potential, though it ignores expenses.

An asset-based, short-term loan from a private lender, secured by the property itself. Hard money loans have higher rates (9-14%) and fees but close in days rather than weeks. Commonly used for fix-and-flip projects, distressed properties, and situations requiring speed.

A strategy where the owner lives in one unit of a multi-unit property (or rents out rooms in a single-family home) and rents the remaining units to cover the mortgage. Allows the use of owner-occupant financing (lower rates, lower down payment) while generating rental income.

A loan where the borrower pays only interest for a specified period (typically 1-10 years), after which payments convert to fully amortizing. Common in bridge loans and some DSCR products. Interest-only payments maximize cash flow during the hold period but build no equity through principal paydown.

A metric that measures the annualized return on an investment accounting for the timing of cash flows. Unlike CoC return, IRR considers the total return over the entire hold period including appreciation, principal paydown, and the exit. An IRR of 15-20% is generally considered strong for real estate.

The ratio of the loan amount to the appraised value or purchase price of the property, whichever is lower. An 80% LTV means the lender is financing 80% of the value and the borrower is providing 20% down. Lower LTV means less risk for the lender and typically better rates.

A property's annual gross income minus all operating expenses, but before debt service and income taxes. NOI = Gross Income - Vacancy - Operating Expenses. It is the single most important number in commercial and multifamily real estate valuation because property value = NOI / Cap Rate.

Designated low-income census tracts where investments in new businesses or real estate developments can receive significant tax benefits, including temporary deferral of capital gains and potential permanent exclusion of gains on the opportunity zone investment if held for 10+ years.

Insurance that protects the lender (not the borrower) when the borrower puts down less than 20% on a conventional loan. PMI typically costs 0.5-1.5% of the loan amount annually and can be removed once equity reaches 20%. Investment property loans generally require 20%+ down, avoiding PMI.

In a syndication, the minimum annualized return paid to limited partners before the general partner receives any share of profits. A common structure is an 8% preferred return, meaning LPs receive an 8% annual return on their invested capital before the GP participates in profit splits.

A projected financial analysis of a property showing expected income, expenses, cash flow, and returns. Pro formas are used to evaluate whether a deal meets an investor's criteria before purchasing. The quality of a pro forma depends entirely on the accuracy of its assumptions.

The fee charged by a property management company, typically 8-12% of collected rent for residential properties and 4-8% for larger multifamily. Fees usually include rent collection, maintenance coordination, and tenant communication. Leasing fees (50-100% of first month's rent) are often charged separately.

A partnership between a sponsor (General Partner) and passive investors (Limited Partners) to acquire, manage, and eventually sell a property. The GP handles operations and decision-making; LPs provide capital and receive returns. Most syndications are structured as LLCs and raise capital under SEC Regulation D.

Monthly rent divided by the purchase price, expressed as a percentage. The 1% Rule suggests a property should rent for at least 1% of its purchase price monthly. A $200,000 property renting for $2,000/month meets the 1% rule. While a useful quick filter, it ignores taxes, insurance, and market-specific factors.

Cash set aside for unexpected expenses, vacancies, and capital expenditures. A common guideline is 6 months of total expenses per property. Reserves protect investors from being forced to sell during temporary cash flow disruptions. Lenders also require reserves as part of loan qualification.

A federal program where the government pays a portion of a tenant's rent directly to the landlord. Section 8 tenants undergo background screening by the housing authority, and a significant portion of rent is guaranteed by the government. Properties must pass HQS (Housing Quality Standards) inspections.

A property rented for periods of less than 30 days, typically through platforms like Airbnb or VRBO. STRs can generate significantly higher revenue than long-term rentals but involve higher operating costs, management intensity, and regulatory risk. Many municipalities are tightening STR regulations.

A creative financing strategy where the buyer acquires a property subject to the existing mortgage remaining in the seller's name. The buyer takes title and makes payments on the seller's loan without formally assuming it. Carries risk of the lender calling the loan due (due-on-sale clause).

The structure that determines how profits are distributed between the General Partner (GP) and Limited Partners (LPs) in a syndication. A common waterfall: first, LPs receive their preferred return; then, remaining profits are split (e.g., 70/30 LP/GP) until a higher return threshold is reached, where the split may shift (e.g., 50/50).

The process of evaluating prospective tenants before signing a lease. Standard screening includes credit check, criminal background check, eviction history, employment verification, income verification (typically 3x monthly rent), and previous landlord references. Fair housing laws must be followed consistently.

A commercial lease structure where the tenant pays all operating expenses including property taxes, insurance, and maintenance in addition to rent. NNN leases are common for retail and commercial properties and provide the landlord with predictable, low-management income.

A fully renovated, tenant-occupied investment property sold to an investor who wants a passive, cash-flowing asset from day one. Turnkey providers handle the acquisition, renovation, tenant placement, and ongoing management. Investors pay a premium but avoid the work of finding, renovating, and placing tenants.

The process of analyzing a potential investment's financial performance, risks, and market fundamentals to determine whether it meets investment criteria. Proper underwriting includes stress-testing assumptions (higher vacancy, lower rent growth, rising expenses) and comparing multiple scenarios.

The percentage of time a property sits unoccupied and not generating income. National average is approximately 5-7% for residential rentals. Market-specific vacancy rates vary significantly and directly impact an investor's actual returns versus pro forma projections.

An investment strategy focused on acquiring underperforming properties and increasing their value through renovations, better management, rent increases, or reducing expenses. Value-add multifamily deals are among the most common syndication structures, targeting a 3-5 year hold with a 15-20% IRR.

A strategy where an investor contracts to purchase a property at a discount and then assigns that contract to an end buyer for a fee, without actually closing on the property themselves. The wholesaler profits from the assignment fee. Legal requirements vary by state.

Zillow's automated home valuation estimate based on public data, comparable sales, and machine learning. While useful as a starting point, Zestimates have a median error rate of approximately 2-7% and can be significantly off for unique properties, recent renovations, or rapidly changing markets. Never rely solely on a Zestimate for investment decisions.

Local government regulations that control how land and buildings can be used in specific areas. Common zoning categories include residential (R1, R2, etc.), commercial (C1, C2), mixed-use, and industrial. Zoning determines what you can build, how many units are allowed, and whether short-term rentals are permitted.