Glossary Flashcards
Become more familiar with real estate and investment terminology to better understand and thrive in the PeerStreet ecosystem.
Accredited Investor
In order to qualify as an accredited investor in the United States, you must fall under one of the following categories according to the SEC:
- You are an individual and earn an income in excess of $200,000 per year, or $300,000 per year jointly with a spouse. This needs to have been consistent for the past two years and you must reasonably be able to expect the same level of income going forward.
- You are an individual who has a net worth exceeding $1 million, either individually or jointly, excluding the value of a primary residence
- You are a general partner, executive officer, director or combination thereof for the issuer of the offered securities
- A bank, insurance company, registered investment company, business development company or small business investment company
- A business in which equity owners all fall under the category of accredited investors
- An employee benefits plan, trust, charitable organization, partnership or company with total assets greater than $5 million
Accrued Interest
Accrued interest is interest that is earned between interest payments but has not yet been paid.
Amortizing Loan
A loan that is amortizing is one in which the borrower pays principal throughout the life of the loan, as indicated by an amortization schedule, rather than just paying one lump sum at maturity.
Appraisal
A real estate appraisal is typically conducted by a third party in an effort to form an opinion of the property’s value.
APR
The annual percentage rate (APR) is the annual rate charged for borrowing (or made by investing), representing the yearly cost of funds over the term of the loan.
ARV
After repair value (ARV) refers to the estimated value of a property after repairs, remodels, and other renovations are completed.
Balloon Payment
This refers to the principal balance due at the maturity of a mortgage. It is referred to as a “balloon” because the payment, for non-amortizing loans, is typically large in size and the entire payment is due on the maturity date of the investment.
Basis Point
Equivalent to 0.01% (or 1/100th of a percent).
BPO
A broker’s price opinion (BPO) is a property valuation report provided by a licensed broker.
Bridge Loan
A bridge loan is a short-term loan that provides liquidity to a borrower and “bridges the gap” between when larger financing is needed.
Cap Rate
The capitalization rate, aka “cap rate,” is the rate of return on a real estate investment based on the expected income the property will generate. It is generally expressed as the ratio of net operating income (NOI) and the total value of the property.
Capital Stack
The term capital stack is used to describe the total amount of capital, both debt and equity, invested in a project. Equity investments are typically at the top of the stack and considered to be those with the highest risk but the potential for higher returns, while positions lower down the stack are less risky and typically yield lower returns.
Commercial Property
A property designed to be used for reasons other than primary residence. Commercial property types include office buildings, retail centers, multifamily apartment buildings, hotels, self-storage facilities, among other things.
Comps
In real estate, comps, or “comparables,” refer to properties with similar characteristics to whatever subject property is being valued.
Debt
In real estate, debt is the amount due based on the contractual agreement or mortgage loan, and the security for the debt is the lien. The property serves as collateral for the loan and the borrower uses cash flow generated from the property to pay regular interest payments. Debt is senior to equity in the capital stack and will be the first to receive any payments or profits.
Default
A borrower can be in default on a mortgage if he/she fails to make required payments on time or makes a payment that is less than the amount due.
Delinquent
A mortgage is considered delinquent if the borrower fails to make required payments on time.
Domicile
For a person or corporation to have a U.S. domicile, they must be U.S. residents or citizens of U.S. companies. A U.S. company is one where its place of incorporation or registration of legal address/registered office is in the U.S. A person cannot have multiple domiciles.
DSCR
The debt service coverage ratio (DSCR) is the ratio of cash a borrower has on hand to service his/her debt obligations (e.g., interest, principal, etc.).
Equity
In real estate, equity is the amount of capital a property owner/developer invests into the property. It can also be measured as the difference between the property’s current market value and the amount of debt outstanding by a mortgage. Equity investors have higher upside potential as the value of a property increases, but they are less protected in a downside scenario as they can lose the total investment value.
FICO Score
FICO scores are a measure of credit risk used by lenders to try to predict borrower behavior. Scores range from 300-850, where lower scores generally represent higher credit risk and vice versa.
First Lien
A first lien position has the first, or priority, position to benefit in the event of a default, foreclosure, or other liquidation of the collateral backing the loan. PeerStreet’s loans are all secured by such senior liens on a property.
Fix-and-Flip
A real estate strategy where an investor purchases a property with the intent of fixing it up and reselling it at a profit.
Hard Money/Private Money Lender
A hard money or private money lender is a non-bank company or individual offering a type of collateral-backed loan. In PeerStreet’s case, private money lenders underwrite and fund real estate loans.
Inflation
Inflation represents the rate at which the price of goods and services is rising and, as a result, purchasing power is declining.
IO Loan
An interest-only (IO) loan is one in which the borrower pays only interest on the principal balance.
JOBS Act
The Jumpstart Our Business Startups (JOBS) Act was signed into law in April 2012 in an attempt to boost funding of small businesses by easing certain regulations.
Leverage
Leverage is the use of financial instruments or additional borrowing in an attempt to multiply a return on investment.
Lien
A right to keep possession of property belonging to another person until a debt owed by that person is discharged.
Liquidity
Liquidity can describe a measure of a person or organization’s amount of cash on hand to meet immediate and short-term obligations. Liquidity can also refer to the ability to quickly buy and sell an asset or security at stable prices.
