Glossary

Absorption Rate: The rate at which available properties are sold or leased in a specific market during a given time period.
Adjusted Basis: The net cost of an asset after adjusting for various tax-related items.
Amortization: The process of gradually paying off a debt over time through regular payments. Often this is represented in an “amortization schedule.”
Appraisal: A professional assessment of a property’s market value. Residential properties rely heavily on comparable sales in the market whereas commercial property evaluations rely more heavily on how much a property produces in net operating income.
Appreciation: An increase in the value of a property over time. Commercial property appreciation can also be accelerated by increasing the NOI of the property.
As-Is Condition: Selling a property in its current state without any repairs or improvements.
Assessed Value: The value assigned to a property by a public tax assessor for taxation purposes.
Assignment: The transfer of rights or property from one party to another.
Building Codes: Regulations that determine building design, construction, and maintenance.
Cap Rate (Capitalization Rate): The rate of return on a real estate investment property based on the income the property is expected to generate. The cap rate is determined by dividing the net operating income by the current market value of the property.
Capital – Financial resources or assets used to generate wealth, invest in businesses, or acquire property. In real estate investing, capital includes equity (owner-invested funds) used for purchasing, developing, or improving properties.
Capital Gains: The profit from the sale of a property or investment.
Capitalization: The process of determining the present value of an income stream. Often this is the most heavily weighted metric in commercial property appraisals.
Cash Flow: The net amount of cash being transferred into and out of a property investment. Positive cash flow is paramount to sustainable real estate investing.
Closing Costs: The expenses incurred during the finalization of a real estate transaction.
Commercial Real Estate (CRE): Property used exclusively for business-related purposes.
Comparative Market Analysis (CMA): An evaluation of similar, recently sold properties to determine the value of a specific property.
Contingency: A condition that must be met before a real estate contract becomes binding. Financing contingency and due diligence contingency are common examples.
Cost Approach: A method of valuing property by considering the cost of replacing or reproducing it.
Debt Service: The amount of money required to cover the repayment of interest and principal on a debt.
Debt Service Coverage Ratio (DSCR): A financial metric used to assess a property’s ability to generate enough income to cover its debt obligations. The DSCR can be calculated by dividing the annual NOI by the annual principal and interest. As an example, a lender may require a DSCR of > 1.25 to fund a property purchase.
Debt-to-Income Ratio (DTI): A measure of a borrower’s monthly debt payments relative to their monthly income. This is usually applicable to single-family residential lending.
Deed: A legal document that transfers ownership of a property from one party to another.
Depreciation: The decrease in the value of a property over time. Depreciation for tax purposes refers to the process of allocating the cost of a tangible asset over its useful life for the purpose of tax deduction. It allows property owners to recover the cost of property over time and reduce their taxable income. Depreciation is used for physical assets like buildings, machinery, vehicles, and equipment.
Distressed Property: A property that is under foreclosure or is in poor condition and being sold at a reduced price.
Due Diligence: The investigation and evaluation of a property before finalizing a purchase.
Easement: A right to use another person’s property for a specific purpose.
Equity: The difference between the market value of a property and the amount owed on it.
Escrow: A financial arrangement where a third party holds and regulates the payment of funds required for two parties involved in a transaction.
Escrow Account: A separate account used to hold funds for specific purposes, such as property taxes and insurance.
Fair Market Value (FMV): The price at which a property would sell on the open market.
Fiduciary: A person or organization that acts on behalf of another person or persons, putting their clients’ interests ahead of their own, with a duty to preserve good faith and trust. Being a fiduciary requires being bound both legally and ethically to act in the other’s best interests. This duty is the highest standard of care in equity or law.
Fixed Rate Mortgage: A mortgage with an interest rate that remains the same for the entire term of the loan.
Foreclosure: The process by which a lender takes control of a property from a borrower who has defaulted on their loan.
Gross Income: The total income generated from a property before any expenses are deducted.
Gross Rent Multiplier (GRM): A ratio used to evaluate the income-producing potential of a property. The GRM can be determined by dividing the property price by the gross annual rental income. This is a common metric in Multifamily property investing.
Ground Lease: A lease agreement that allows the tenant to use a piece of land owned by the landlord.
Hard Money Loan: A loan secured by real property, typically used for short-term financing.
Home Equity Line of Credit (HELOC): A loan that allows homeowners to borrow against the equity in their home. It is usually an interest-only loan and at a variable rate with no pre-payment penalty.
Home Equity Loan: A loan that allows homeowners to borrow against the equity in their home. It is usually at a fixed rate higher than the original mortgage.
Homeowners Association (HOA): An organization in a subdivision, planned community, or condominium that makes and enforces rules for the properties within its jurisdiction.
Inspection: A thorough examination of a property to assess its condition.
Interest-Only Loan: A loan where the borrower pays only the interest for a set period.
Internal Rate of Return (IRR): A measure of an investment’s profitability, taking into account the time value of money. IRR is commonly used in finance and real estate to evaluate the potential return of an investment based on its expected cash flows.
Investment Grade Property: Real estate that is considered to be a low-risk investment based on the quality, location, occupancy, credit rating of the tenant, etc.
Investment Property: Real estate purchased with the intention of earning a return, typically through cash flow and/or capital gains.
Joint Venture (JV): A partnership between two or more parties to achieve a specific investment goal where all owners are actively involved in day-to-day management and share the risk.
Landlord: The owner of rental property.
Lease: A contract by which one party conveys property to another for a specified period. Commercial property leases are typically 3-10 years or longer.
Leverage: The use of borrowed capital to increase the potential return of an investment.
Lien: A legal claim against a property for unpaid debts.
Listing Agreement: A contract between a property owner and a real estate broker authorizing the broker to find a buyer or tenant.
Loan-to-Value Ratio (LTV): The ratio of a loan to the value of an asset purchased. Commercial property lenders usually hold the LTV to 75% requiring a minimum of 25% down. However, LTVs can be constrained by other metrics such as the DSCR.
Market Analysis: The study of market conditions, risks, and trends to assess the potential success of a particular investment in a specific geographic area.
Market Rent: The rent a property can command in the open market.
Market Value: The estimated amount for which a property should be exchanged on the date of valuation.
Mixed-Use Development: A property that combines residential, commercial, and/or industrial uses.
Mortgage: A loan used to purchase real estate, with the property serving as collateral.
Multifamily Property: A building or complex containing multiple separate housing units.
Net Operating Income (NOI): NOI is a key financial metric used to evaluate the profitability and operating performance of income-producing properties. It represents the income generated from a property after deducting all operating expenses but before deducting taxes and financing costs.
Occupancy Permit: A permit issued by local authorities allowing a building to be occupied.
Occupancy Rate: The percentage of available rental units that are occupied.
Operating Expenses: The costs associated with maintaining and operating a property. This usually includes taxes, insurance, maintenance, management, legal, accounting, etc.
Option: A contract giving the buyer the right to purchase a property at a future date.
Owner Financing: When the seller provides financing to the buyer for the purchase of a property. This can also be referred to as “seller financing.”
Pre-Approval: A preliminary evaluation by a lender of a potential borrower’s ability to obtain a loan.
Principal: The amount of money borrowed on a loan.
Pro Forma: A financial statement that projects future income and expenses.
Property Management: The day-to-day operation, control, and oversight of real estate. Usually, property management is outsourced to a professional, full-service company that is familiar with the asset class and the local market where the property is located.
Real Estate Broker: A licensed professional who represents buyers, sellers, and tenants in real estate transactions.
Real Estate Cycle: The four phases of the real estate market: recovery, expansion, hyper-supply, and recession. Different opportunities present themselves during different phases of each cycle.
Real Estate Investment Trust (REIT): An investment company that owns, operates, or finances income-producing real estate. They are modeled after mutual funds and do not allow for individual investors to benefit from depreciation deductions.
Real Estate Owned (REO): Real estate that has gone through the foreclosure process and is now owned by a lender, typically a bank, mortgage company, or government agency. When a borrower defaults on their mortgage and the property fails to sell at a foreclosure auction, it becomes an REO property.
Real Property: Land and anything permanently attached to it.
Refinancing: The process of replacing an existing loan with a new one.
Rehabilitation: The process of improving a property through renovations and repairs.
Rent Roll: A report that lists all the rental units in a property, along with tenant information and lease terms.
Return on Investment (ROI): A financial metric used to evaluate the profitability of an investment relative to its cost. ROI measures the gain or loss generated by an investment compared to the amount of money invested. It is commonly used by investors to assess the efficiency and performance of their investments. ROI is expressed as a percentage that is calculated by dividing the net profit by the cost of investment.
Risk Assessment: The identification and analysis of potential risks associated with an investment.
Sales Comparison Approach: A method of valuing property by comparing it to similar properties that have recently sold.
Securitization: The process of pooling various types of contractual debt and selling them as consolidated financial instruments.
Short Sale: The sale of a property for less than the amount owed on the mortgage.
Single-Family Home (SFH): A residential property designed for one family.
Speculative Investment: An investment with a high level of risk and the potential for high returns.
Sublease: A lease agreement between a tenant and a third party for all or part of the leased premises.
Subordinate Financing: Secondary or junior loans that are lower in priority compared to the primary loan.
Tax-Deferred Exchange: A transaction that allows an investor to defer paying capital gains taxes on an investment property. One of the most common examples is often referred to as a “1031 exchange.”
Tax Lien: A legal claim by a government entity for unpaid property taxes.
Tenant Improvements (TI): The customization and improvement of rental space to fit the needs of a tenant.
Title: The legal right to own, use, and sell a piece of property.
Title Insurance: Insurance that protects against losses due to defects in the title.
Triple Net Lease (NNN): A lease agreement where the tenant pays all operating expenses, including property taxes, insurance, and maintenance.
Turnkey Property: A fully renovated property ready for immediate occupancy or rental.
Underwater: A situation where the balance of a mortgage loan exceeds the market value of the property.
Underwriting: The process of evaluating and assessing the risk of an investment or loan.
Vacancy Rate: The percentage of all available units in a rental property that are vacant.
Variable Rate Mortgage: A mortgage with an interest rate that can change over time.
Warranty Deed: A deed in which the seller guarantees that they hold clear title to a property and have the right to sell it.
Wholesaling: The process of finding discounted properties, getting them under contract, and selling the contract to another investor.
Yield: The income return on an investment.
Zoning: The regulation of land use by local government to control the types of structures that can be built in certain areas.