Real Estate 101 Glossary Flashcards
ACTIVE INVESTOR
Managing partner, finds deals, capital, and builds a team (property managers, brokers, lenders, contractor/inspector, lawyers)
ARV
(After Repair Value)
This is an estimate, based on comparable properties near the subject property, of the value of the home after it has been repaired and remodeled.
AMORTIZATION
A way to pay off debt in equal installments that include varying amounts of interest and principal payments over the life of the loan.
APPRAISAL
A third party’s (appraiser) opinion of value of the property usually based on comparable sales or income (investment properties).
APPRAISAL DISPUTE
If the appraisal comes in low, the buyer’s agent and seller’s agent will get together, pull comps, and dispute the appraisal with the appraiser. If the appraiser agrees, he/she may change the value.
APPRAISAL OBJECTION
Deadline when the Buyer must submit in writing that the appraiser’s valuation is less than the purchase price.
APPRAISAL RESOLUTION
If the appraisal comes in low, this is the deadline in which the Buyer and Seller must agree upon reducing the purchase price, the Buyer bringing more cash to close, or a combination of the two. If an agreement can’t be reached, the contract ends.
BRRRR
Buy, Rehab, Rent, Refinance, Repeat
The strategy in which you purchase a property for below market value (Buy), Rehab the property to add value, Rent the property out, Refinance the property at the new value, and Repeat the process
CAP RATE
(Capitalization Rate)
A calculation used to determine the potential return on an investment property in relation to its price.Calculated by taking the NOI and dividing it by the purchase price. (Ex. NOI is 100k, price is 1 million, cap rate is 10%) Formula For Cap Rate: NOI/Purchase price = Cap Rate
CASH FLOW
The net amount of money generated from a rental property after all expenses and any debt service are paid. Formula for Cash flow: Gross income - vacancy, operational expenses, and debt
COCR
(Cash On Cash Return)
Taking the cash flow from an asset and dividing it by the total amount invested.
CMA
(Comparative Market Analysis)
A report an agent pulls for its client. It shows recent sales of similar properties in a similar area of a subject property.
CONTINGENCY
A condition put on an offer to buy a home; such as the prospective buyer making an offer contingent on his or her sale of a present home.
COST SEGREGATION
A tax planning tool that gives real estate investors the chance to accelerate the depreciation of their investment properties.
DEBT INVESTOR
A limited partner that invests money into the deal and is secured through a note. The debt investor will collect a fixed interest rate return and will not incur any risks associated with the deal.
DEED
The official document that lists the legal owner of the property.
DEPRECIATION
The process used to deduct the costs of buying and improving a rental property. Calculated by taking the value of the building and dividing it by 27.5 years for residential rentals and 39 for commercial buildings.
Formula or Cash flow: Value of the building only/ 27.5 or 39 years.
DOWN PAYMENT
The initial payment made towards acquiring the loan.
DSCR
(Debt Service Coverage Ratio)
The ration that indicates how often the NOI of a property covers the Debt Service (If NOI is 120k and annual Debt Service is 100k, then the DSCR is 1.2)
EMD
(Earnest Money Deposit)
A small deposit sent by the buyer, usually held in an escrow account that makes sure the buyer has “skin in the game.” EMD is typically sent out shortly after the asset is under contract.
ESCROW
A procedure in which documents or transfers of cash and property are put in the care of a third party, other than the buyer or seller (usually the attorney).
EQUITY
The difference between the market value of a property and the amount of money still owed on it.
EQUITY INVESTOR
A limited partner that invests money into the deal and is secured by the ownership equity in the partnership. Returns may vary considering they take both the risks and reward for the deal.
EXPENSE RATIO
Percentage number that shows what the expenses are relative to gross income.
FSBO
(For Sale By Owner) Property that is for sale by owner
GRM
(Gross Rent Multiplier) The ratio of the property’s market value over its annual gross rental income.
HARD MONEY
Institutional lenders that will typically charge upfront points.
HOA
(Homeowners Association)
A governing body that manages the shared amenities and common areas of a residential community
IRR
Investment Rate of Return
Taking the yearly principal paid down and cash flow and dividing it by the total amount invested. IRR will change considering both the cash flow and principal paid off each year will be different. (Ex. Total invested amount is 100K, annual cash flow collected 10K, and the annual principal paid off is 5K. Cashflow and principal would be added and then divided by the total invested amount. In this
case, 10K + 5K = 15K. 15K divided by 100K = 0.15 = 15% IRR)
Formula for IRR: Yearly Cash Flow & principal paid off / Total investment amount.
LANDLORD
The owner of a rental property who collects rent from tenants.
LEASE
A legal agreement between a landlord and tenant outlining the terms of the rental agreement.
LIMITED PARTNER
Opposite to “Managing Partner”. Typically the passive investor that will contribute to the venture but investing the capital needed to get the deal done, nothing more.
LOI
(Letter of Intent)
Letter that indicates the intention for the buyer to purchase the property.
LTV
(Loan to Value)
The number (usually in percentage form) that shows what the balance of the loan is relative to the value of the property. (Ex. If the balance on the mortgage is 70k and the value of the property is 100k, the LTV is 70%)
Formula: Value of property / Balance of loan
MORTGAGE
A loan used to purchase a property.
NOI
(Net Operating Income)
Income after vacancy and expenses not including any debt service.
Formula for NOI: Gross income - Vacancy and operating expenses.
OPERATIONAL EXPENSES
Expenses that are required to directly run the asset. Most common examples include: Taxes, insurance, maintenance, management, utilities, etc. Example of it is NOT: Depreciation and interest expense.
PASSIVE APPRECIATION
The increase in the value of the property over time
PHASED APPRECIATION
The increase in the value of the property due to improvements within the local area. (Ex. Other properties on the same street undergo heavy rehab projects. A high end grocery store is built nearby, etc)
PASSIVE INVESTOR
Silent partner that typically receives some form of return through their financial investment.
PITI
An acronym for principal, interest, taxes, insurance, and sometimes PMI. This is your full monthly payment.
PRINCIPAL PAY DOWN
The amount of principal that’s paid off on a property in a duration of time.
PROOF OF FUNDS
Documentation or any evidence that the buyer has the liquidity to purchase the property.
PROPERTY MANAGEMENT
The oversight and management of a rental property by a third-party
management company or the property owner themselves.
PROPERTY TAX
A tax levied on the value of a property by the local government.
ROI
(Return On Investment)
A calculation of the profitability of an investment
TENANT
An individual or entity that rents a property from the owner.
TENANTS IN COMMON
Two or more people share ownership rights in a property or parcel of land. The tenancy in common partner has the right to leave their share of the property to any beneficiary as a portion of their state.
TENANTS IN SEVERALTY
An exclusive and separate right of possession or ownership, unshared with others. In other words, sole ownership of a property.
TITLE
The ownership and right to use of that property. It is the concept of ownership rights.
TITLE INSURANCE
Protects lenders and homeowners against loss of their interest in property due to legal defects in the title.
TURNKEY
Property that has no deferred maintenance and ready to be rented out
ZONING
The regulation of land used by local governments, which can impact the use and development of a property.
