People throw hundreds of jargony real estate terms around in the industry, half of them acronyms. If you’re new to the industry, you almost need to carry around a glossary of terms in real estate investing.
Which is precisely what this is: your pocket guide to real estate vocabulary. Bookmark it and come back whenever some pompous blowhard starts spouting jargon.
All right, enough preamble, let’s dive into the real estate terminology!
Terms in Real Estate Investing
Even I occasionally get confused or tripped up by all the real estate acronyms and legalese. And I’ve been in the industry for 20 years.
Don’t beat yourself up if you don’t master every one of these real estate terms instantly.
506(b) / RegD 506(b)
A legal classification of an investment, based on Regulation D of the Securities Act. It allows unlimited accredited investors and up to 35 sophisticated investors to participate.
506(c) / RegD 506(c)
An alternative legal classification, which only allows accredited investors to participate in an investment. It requires companies to register an investment as a security with the Securities and Exchange Commission (SEC), but gives them flexibility to advertise in order to raise money.
A tax maneuver where you defer capital gains taxes after selling a property, by buying a like-kind investment property within 180 days of selling the old property. Eventually you do need to pay capital gains tax when you sell the replacement property — unless you do another 1031 exchange.
The rate at which properties in a market sell. You calculate it by dividing the number of properties sold in a given time frame by the total number of properties available for sale.
Accessory Dwelling Unit (ADU)
An accessory dwelling unit is an extra housing unit on a property that the owner can rent out or use for guests. Generally speaking, it doesn’t require rezoning the property or getting a separate water or electric meter. Many homeowners use them for house hacking, either for long-term tenants or short-term Airbnb guests.
A wealthy investor allowed to invest in certain private equity investments, based on SEC regulations. To qualify, you must have a net worth over $1 million not including equity in your home, or have earned at least $200,000 for each of the last two years with the expectation you’ll do the same this year ($300,000 for married couples). Accredited investors are also known as qualified investors.
A one-time fee charged by the lead investor (AKA syndicator or sponsor or general partner) for finding, financing, and closing on a real estate deal.
Adjustable Rate Mortgage (ARM)
A mortgage loan where the interest rate fluctuates or “floats” based on some benchmark interest rate such as the federal funds rate or the LIBOR. Adjustable rate mortgages do come with an introductory fixed interest rate however, typically for three, five, or seven years. You can borrow an ARM from conventional lenders such as Credible or from portfolio lenders such as Kiavi, Visio, or LendingOne.
The alternative to an ARM is a fixed-rate mortgage, with a locked monthly mortgage payment for the life of the loan.
After-Repair Value (ARV)
The real estate market value of a property after you complete renovations. If you flip homes or use the BRRRR method, you need to forecast the ARV before buying.
Installment loans such as mortgage loans follow an amortization schedule, dictating how much of each monthly payment goes toward principal versus interest. This proportion changes with each payment, with more money going toward interest at the beginning of the loan, and more going toward paying down your principal balance toward the end. Check out our amortization schedule calculator to see how it works.
Asset Management Fee
An annual fee charged by asset managers, although they sometimes split it into monthly or quarterly fees when charging you. It’s based on a percentage of the total asset value that you have under management with them.
A fee charged to a buyer for assuming the seller’s mortgage, rather than taking out their own new loan.
Average Annual Return
The total return on an asset, divided by the number of years held. If you earn a total return of 100% on a property you owned for five years, that comes to an average annual return of 20% (100% / 5 = 20%). It does not take into account compounding returns, so it’s a less accurate measure of an asset’s return on investment than internal rate of return (IRR).
Blind Pool Fund
A fund where investors don’t know exactly what assets the fund will end up holding — hence, the “blind.” Investors typically opt in based on the reputation of the sponsor or lead investor, since they can’t evaluate the underlying assets. It allows flexibility for syndicators or fund managers to raise money and then go out and find the best possible deals with cash in hand.
Breakeven Occupancy Rate
The occupancy rate of an investment property at which the owners would break even. For example, if a building’s breakeven occupancy rate is 65%, then at occupancy rates over that point the owners will earn a profit.
A short-term loan allowing investors to purchase a property, often with equity from a different property.
A strategy where investors buy, renovate, rent, refinance, and repeat (hence the real estate acronym BRRRR). In other words, you buy a fixer-upper and renovate it, but instead of selling it like a flip, you refinance and keep the real estate property. The huge advantage of the BRRRR method is that you can theoretically pull your initial down payment back out of the property when you refinance, since the refinance is based on the after-repair value.
Capitalization Rate (Cap Rate)
A property’s annual net operating income (NOI) divided by the cost or purchase price. You can also think of it as the yield that investors earn, not counting any financing or investment property loans used. Higher cap rates favor buyers (they earn high yields for their money) while lower cap rates favor sellers (they score higher sales prices for the same income). Read more on cap rates in real estate investing here.
Capital Expenditure (CapEx)
Capital expenditures or capital improvements are major repairs or improvements to a property to extend its lifespan or improve its value. You can add these to a building’s cost basis for accounting and tax purposes, and depreciate them on your tax bill. Read more on CapEx in real estate here.
Capital Gains/Capital Gains Tax
Capital gains are taxable profits when you sell an asset. The IRS taxes capital gains differently, based on how long you owned the asset. You pay short-term capital gains tax on assets held for less than a year, taxed at your regular income tax rate. However you pay the lower long-term capital gains tax rate on assets held longer than one year. Long-term capital gains tax rates range from 0-20%, depending on your income level. Read up on ways to defer or avoid capital gains taxes on real estate.
The monthly or yearly net income you can expect to earn from an income property or other investment. You can run the numbers on any property with our rental cash flow calculator.
The annual income yield you earn on your own cash investment in a property. For example, if you put down a $20,000 down payment plus $5,000 in closing costs on a property, and you earn $2,500 per year on it, you earn a 10% cash-on-cash return ($2,500 net annual income / $25,000 cash investment). The same concept applies to real estate syndications, and refers to the net cash flow you earn on your cash investment. Play around with our cash-on-cash return calculator to run the numbers on any investment property.
Fees, taxes, and other costs that hit you when you buy or sell a property. These include lender fees and points, title company fees, attorney fees, real estate agent fees, recording fees, transfer taxes, and prepaid expenses such as property taxes and property insurance premiums. Read up on who pays which closing costs in a real estate transaction.
Cloud on the Title
If the title history isn’t clear and clean, title agents refer to the problem as a “cloud on the title.” Problems can include disputed ownership or an unclear chain of title and ownership.
In accounting, your cost basis is how much you paid for an asset. You use the cost basis to determine your capital gains when you go to sell the asset. For example, if you buy a property for $100,000 and sell it for $150,000, you subtract your cost basis ($100,000) from your sales price ($150,000) to determine your taxable gain ($50,000). You can increase your cost basis through capital improvements and repairs to the property, to reduce your taxable profit.
Cost Segregation Study
When real estate syndicators buy a property, they often conduct a cost segregation study to reclassify as much of the property as possible into tax categories with shorter depreciation periods. They do this so they can deduct as much as possible for depreciation, during the few years that they own the property.
The SEC allows companies to raise capital from the public under certain crowdfunding regulations. You as an investor can invest for fractional ownership in whatever asset the crowdfunding platform buys, manages, and sells. For example, real estate crowdfunding platforms either own properties or debt secured by properties (or both). Specific examples include Arrived Homes (fractional ownership in rental properties), Groundfloor (fractional ownership of short-term hard money loans), and Fundrise (a broad mix of properties and loans secured by real estate).
Debt Service Coverage Ratio (DSCR)
Instead of looking at your personal income, often rental property lenders look at how well the property cash flows. They measure this by DSCR: the ratio of a property’s net operating income (NOI) to its debt service (the annual cost of making loan payments). For example, if a property earns $10,000 in net income each year, and the annual debt service costs $7,500, it has a DSCR of 1.25 ($10,000 / $7,500 = 1.25).
There are two definitions of defeasance, depending on the context.
In the context of sales contracts, defeasance refers to conditions under which the contract can be voided or nullified.
In the context of commercial real estate loans, defeasance refers to ways for the borrower to reduce prepayment penalty fees.
The US tax code allows property owners to deduct a portion of the building’s value each year. Investors can depreciate the building itself over 27.5 years, but other parts of the building (such as appliances) can be depreciated over shorter periods. Check out our property depreciation calculator for more information.
When investors sell a property, they have to pay the IRS back for the deductions they took for depreciation. You have to do this whether you actually took the deduction or not, so make sure you deduct for depreciation each year!
A property with a “distressed seller.” Since that’s a rather circular definition, a distressed seller is an owner in some form of financial distress, such as in foreclosure or tax sale. You can find distressed sellers through tools like Foreclosure.com, Propstream, and Deal Machine.
Monthly or quarterly payments to fractional property owners and partners, to “distribute” cash flow to them.
The evaluation of a prospective investment property, to make sure it will actually make a good investment. Due diligence can include research on the city and neighborhood to determine future demand for housing there, and of course a detailed evaluation of the property itself, including a home inspection, title report, and more. Read more on due diligence in real estate here.
Earnest Money Deposit (EMD)
The deposit put down by a potential buyer in a real estate sales contract. The real estate broker or title company often holds the EMD in escrow.
Economic Occupancy Rate
The money actually received from an income property, as a percentage of the total potential income it can generate. For example, if an apartment building would earn $10,000 if all units were occupied and all tenants paid rent on time, but it only generated $9,000 in actual income last month, it has an economic occupancy rate of 90%.
Equity Multiple (EM)
The total returns and capital reimbursements divided by your total investment in a commercial property. For example, if you buy an apartment building for $1 million and sell it a few years later for $1.9 million, and you earned $100,000 in cash flow in the meantime, you have a 2.0 equity multiple ($2 million returned / $1 million investment). It’s a simplistic way of measuring returns, for better and worse.
Money held by a neutral party, to ensure its delivery once certain conditions are met. For example, a seller may agree to pay for certain repairs, but only if the property settles. They may put the money in escrow with the title agency or real estate brokerage to be held until the property settles.
In mortgage financing, escrow refers to the borrower paying for property taxes and homeowners insurance through the mortgage lender. The borrower includes these costs with their monthly mortgage payments, and the financial institution pays the bills on behalf of the borrower.
An adjustable interest rate on a loan, such as on an ARM.
General Partner (GP)
Typically used synonymously with sponsor or syndicator, it’s the lead investor on a commercial real estate deal. They usually earn extra returns on the deal to compensate them for their labor in putting the deal together and overseeing it.
Gross Rent Multiplier (GRM)
The property’s price divided by the gross annual rental income (not including expenses). If a property costs $120,000, and generates $12,000 in gross annual rents, it has a gross rent multiplier of 10 ($120,000 / $12,000 = 10). Lower is better for investors — check out this interactive map of the best cities for rental investing by GRM.
How long the syndicator or sponsor plans to own (hold) the property before selling. While sponsors don’t hesitate to sell earlier than the planned holding period of time, they aim never to exceed it.
Hardly the most confusing of terms in real estate investing, eh?
Using your home to generate revenue, which then offsets some or all of your housing costs. The classic house hacking strategy involved buying a multifamily property such as a duplex or triplex, moving into one unit, and renting out the others. But other house hacking tactics include renting out rooms to housemates, renting out an accessory dwelling unit, renting out storage space. Read up on ten house hacking ideas here.
A loan that doesn’t amortize, where the borrower only pays interest and doesn’t pay down the principal balance. For example, if you borrow $50,000 interest-only at 10%, you would pay $5,000 per year ($416.67 per month) in interest. These are typically short-term loans, one-to-three years in length.
Internal Rate of Return (IRR)
The annualized return on an investment, taking compound returns into account.
Imagine you invest $100,000 in a real estate syndication and don’t receive any distributions. After a two-year holding period, the sponsor sells the property, and you get paid back $140,000. You earned a $40,000 return on your $100,000 investment after two years. The average annual return on this deal was 20% (a 40% total return divided by two years). However, that doesn’t take into account the money you would have earned if you’d earned those returns spread over the holding period, and had been able to reinvest them for even more money.
Internal rate of return is your annual return, if you had collected them throughout and been able to reinvest them for compounding returns. In this example, the IRR is 18.32% (compared to the average annual return of 20%). If you collected an 18.32% return ($18,320) in Year 1 and reinvested it at the same return, you’d have $118,320 invested for the second year at the same 18.32%, which would earn you $21,680 in returns for Year 2. That comes to a total of $140,000.
Still a little fuzzy on this particular real estate vocabulary? Read more and play with our free IRR calculator to get a better sense for IRR.
Joint Venture (JV)
A partnership by two or more investors to form a company and go in on a real estate deal together. The partnership interests don’t have to be equal, nor does what they each bring. One partner might bring money while another brings expertise or labor or something else of value to the partnership.
Our Co-Investing Club does joint venture deals together, pooling our funds to invest in passive real estate syndications each month.
K-1 Tax Form
The tax form given to each partner with ownership interest in a company, that reports that year’s profits, losses, and dividend or distribution payments. If you own a percentage of a company that owns an investment property, you’ll receive a K1 form in February or March to break down the prior year’s income or losses.
Interestingly enough, real estate investors often receive distributions from cash flow but still show a net loss on their K1, due to the “paper loss” of depreciation.
Limited Liability Company (LLC)
A type of legal entity that is simple and inexpensive to create and maintain. Real estate investors most commonly use LLCs to buy and own investment properties. Aside from potential tax benefits and offering an easy way to share legal ownership of a property, LLCs provide some liability protection for owners, theoretically limiting their legal liability to only the assets owned by the LLC.
Limited Partner (LP)
A passive, monetary investor in a private equity deal such as a real estate syndication. You invest money in a deal and receive fractional ownership, but you don’t actually do any labor or property management.
Loan-to-Cost Ratio (LTC)
The percentage of the total costs of buying and renovating an investment property that the loan covers. For instance, say you buy a property for $100,000 and plan to put another $100,000 into it, for a total cost of $200,000. If you take out a loan for $160,000, that amounts to an LTC of 80%.
Loan-to-Value Ratio (LTV)
The percentage of the purchase price or property value that a loan covers. If you borrow $80,000 to buy a property that costs $100,000, that represents an 80% LTV. Most rental property lenders allow up to 70-85% LTV.
The difference between the top market rent for a property and the rent listed on the lease agreement. In other words, it measures how much the landlord is undercharging for rents.
Metropolitan Statistical Area (MSA)
A region surrounding a major city, which includes satellite towns and cities. Put another way, it’s the broad metropolitan area of a major city. For example, Dallas and Fort Worth share one large metropolitan area.
Mortgage Insurance Premium (MIP)
Similar to PMI, this insurance policy protects the lender in case the borrower defaults on the loan. This is the name for mortgage insurance required by FHA loans, as opposed to conventional loans through Fannie Mae or Freddie Mac. The major difference between MIP and PMI is that you must pay for MIP for the entire life of the loan, even after you pay the balance below 80% of the current market value.
Net Operating Income (NOI)
The annual cash flow produced by a property, minus all operating expenses (except for loan payments). Net operating income includes the gross rents for the year, minus expenses like property taxes, property insurance, vacancy rate, property management fees, condo association fees, repairs, maintenance, and so forth.
Someone who is not an accredited investor, AKA a qualified investor.
A loan that does not require the borrower to sign a personal guarantee. If the borrower defaults, the lender may repossess the property, but not sue the borrower personally to recover any losses. Non-recourse loans do come with exceptions for fraud and negligence however.
(article continues below)
A legal document prepared for an LLC or other legal entity, outlining the company’s rules, procedures, ownership interests, and other relevant details for how the company operates.
Expenses incurred in the operation and management of a property (or business in general). These include property management fees, property taxes, insurance, repairs, and so on.
Often used synonymously with syndicator, sponsor, or general partner, this is the person or company that finds and manages real estate deals.
Investing only your money in a real estate deal, and not time or labor. When you invest in a real estate syndication as a limited partner, you just invest money in the deal. You don’t have to worry about finding properties for sale, lining up financing, overseeing property managers or contractors, etc. This is the opposite of active investing, where you buy properties directly and have to actively take on all the labor that comes with them.
Physical Occupancy Rate
The percentage of the units at a multifamily property that are physically occupied. This is distinct from economic occupancy rate, which measures the percentage of potential income that you receive. If a building has ten units and nine of them are occupied, you have a physical occupancy rate of 90%.
Preferred Return (“Pref”)
Some real estate syndicators offer passive investors a preferred return up to a certain percentage, meaning that the passive investors get paid up to that return before the syndicator takes any cut of the profits. If there’s a shortfall in a given year, it typically carries forward to the next year. For example, say you invest in a multifamily syndication with a preferred return of 8%, and in the first year it only returns 7%. The next year, you collect your 8% plus an extra 1% to cover the shortfall from the prior year (assuming the property generated enough profit to cover it).
Bear in mind that the sponsor might still take their returns each year even if the preferred return is not reached, but when the property sells, they must catch up on any unpaid preferred returns before paying themselves.
A fee charged by mortgage lenders for paying off the loan early. For instance, a lender might charge a 1% prepayment penalty if the borrower pays off the loan within the first three years.
Some lenders structure prepayment penalties on a step-down basis. For example, they might charge a 3% fee for paying off the loan within the first year, a 2% fee for paying it off in the second, and a 1% fee for paying it off in the third year.
Private Mortgage Insurance (PMI)
An insurance policy that protects the mortgage lender against the risk of the borrower defaulting. If a homeowner borrows more than 80% of the property’s value, they must typically pay the lender for a PMI policy as part of their monthly payment.
Private Placement Memorandum (PPM)
The legal document signed between real estate syndicators and passive investors, outlining the details of the investment, returns, and rights and responsibilities of each party. Some sponsors refer to this as an offering memorandum.
A financial statement projecting profits and losses for the next 1-5 years.
Promoted Interest (“Promote”)
A separate portion of the profits on a real estate syndication, taken by the sponsor to compensate them for their labor in finding and managing the property. This is separate from any acquisition fees or asset management fees that they also charge. For example, a deal may split profits 80/20 between passive investors and the syndicator, with 80% of profits being divided proportionately based on financial investment, and the other 20% of profits going straight to the sponsor. Sometimes the promote kicks in after the preferred return is met, such as a preferred return of 8% followed by a 70/30 split. Additionally, the promote can sometimes change based on the returns, such as 70/30 split for returns over 8%, followed by a 60/40 split for returns over 14%, followed by a 50/50 split for returns over 20%.
Ratio Utility Billing System (RUBS)
A system for billing tenants for their utilities, after the bill comes. It could be based on leased square footage, or on occupancy.
Real Estate Investment Trust (REIT)
A company that retail investors can invest in, that owns real estate or debt secured by properties. They receive certain tax benefits, but they must pay out at least 90% of all profits back to investors each year. Some REITs trade publicly on stock exchanges, others you can invest in privately through real estate crowdfunding platforms.
Rent Comparable Analysis (Rent Comps)
An analysis of similar properties located near yours, to determine the market rents for your property.
A spreadsheet documenting all leases for a multifamily property or rental property portfolio. This should include lease agreement dates, rent amounts, tenant names, security deposits, market rents versus actual rents, and the rent status.
Self-Directed IRA (SDIRA)
An individual retirement account (IRA), in which you can invest in virtually any type of asset. That’s opposed to standard IRAs held through brokerage firms, which only let you invest in publicly-traded securities. You must hire a custodian to oversee your SDIRA. Read up on how to invest in real estate through a self-directed IRA, whether rental properties or real estate syndications.
An amount supplied by the seller to help cover the buyer’s closing costs. These are typically capped by lenders in the range of 5-6% of the purchase price.
An amount verbally — but not legally — committed by a passive investor toward a real estate syndication deal. It indicates interest without legally binding you to invest in a deal.
A non-accredited investor who has knowledge about the type of investment being made, and is therefore allowed to participate by the SEC. On 506(b) deals, sponsors may accept money from up to 35 sophisticated investors.
Often used interchangeably with syndicator, operator, or general partner, this is the person or company who finds a real estate deal and oversees it through the full cycle of ownership. In other words, the lead investor on a commercial real estate deal.
A small geographic area within a larger city or metropolitan area. This could be a neighborhood, or a cluster of small neighborhoods, all of which share similar characteristics and rents.
A contract between a real estate syndicator and a passive investor/limited partner outlining the amount being invested and subsequent ownership interest transferred.
Syndication/Real Estate Syndication
A commercial real estate deal in which the lead investor raises money from passive investors/limited partners to help cover the cost. In exchange for a financial investment, the limited partners get an ownership interest in the property or fund.
While the most common type of real estate syndication features multifamily apartment buildings, syndications could own self-storage facilities, mobile home parks, agricultural land, oil or mineral rights, industrial properties, office buildings, or any other type of real estate. Some own debts secured by real estate, rather than owning properties. Likewise, some sponsors offer single-asset syndications that just own one property, or funds that own multiple properties or loans.
Most real estate syndications require a minimum investment of $25,000 – $100,000, although in our Co-Investing Club we pool funds to buy into syndications each month for $5,000 – $10,000 per club member.
Vacancy rate measures the percentage of time that a specific property sits vacant. For example, if a single-family rental property sits vacant for three months over a three-year period, it has a vacancy rate of 8.33% (3 months / 36 months = 8.33%).
A real estate deal where the buyer plans to “force equity” and actively add value to the property. Investors could add value by renovating the property, by building new units or amenities, or by some other means of upgrading the property. Flipping houses is an easy example of a value-add real estate strategy, although value-add is typically used in the context of commercial real estate deals.
The return structure for a real estate syndication. In particular, “waterfall” refers to the series of levels at which passive investors/limited partners get paid. For example, there might be a preferred return of 8%, followed by a 70/30 split (with 30% going straight to the sponsor and the other 70% being divided proportionately among financial investors). More complicated waterfalls could have additional thresholds for splitting profits, such as returns over 14% being split 60/40, and returns over 20% being split 50/50, etc.
The income generated by an investment property, as a percentage of the cost to buy it. For instance, if you buy a property for $100,000 and it generates $8,000 in net income each year, that comes to a 8% yield.
Final Thoughts on Real Estate Terms
Whew! Got all that? The test is next Tuesday.
Nah, don’t stress over the real estate vocabulary broken down above. You probably don’t need to know every term in this glossary. Just bookmark this page to look up real estate terminology as you need it.
The terms in real estate investing might seem daunting, but you only really struggle in the beginning when each definition feels like it uses other real estate terms you don’t know. Once you grasp the main real estate vocabulary, the rest comes together easily enough.♦
Still confused about real estate acronyms or other terms in real estate? Which real estate investing definitions are giving you trouble?
More Real Estate Investing Reads:
About the Author
G. Brian Davis is a landlord, real estate investor, and co-founder of SparkRental. His mission: to help 5,000 people reach financial independence by replacing their 9-5 jobs with rental income. If you want to be one of them, join Brian, Deni, and guest Scott Hoefler for a free masterclass on how Scott ditched his day job in under five years.