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Investing Terms to Know

Cap Rate (Capitalization Rate): A measure of the return on investment (ROI) for a real estate property, calculated by dividing the property's net operating income (NOI) by its current market value. 

Cash Flow: The amount of money generated from a real estate investment after deducting operating expenses and mortgage payments from rental income.

Equity: The difference between the market value of a property and the outstanding mortgage balance.

Appreciation: The increase in the value of a property over time, due to factors such as market conditions and property improvements.

Acquisition Cost: The total cost of buying an investment property, including mortgage loan fees, closing costs, inspection fees, etc. 

Accessory Dwelling Unit (ADU): A smaller, independent residential dwelling unit located on the same lot as a stand-alone (i.e., detached) single-family home.

Depreciation: A tax deduction that allows real estate investors to recover the cost of their investment property over time through annual tax deductions.

Leverage: The use of borrowed capital (such as a mortgage) to increase the potential return on investment.

ROI (Return on Investment): A measure of the profitability of an investment, typically calculated as the ratio of net profit to the initial investment amount.

Cash-on-Cash Return: The cash return on investment compared to the amount of cash invested. For example, an investment with cash distributions of $50 on a $1,000 investment has a 5% cash-on-cash return.

Affordable Housing: Dwelling units that cost no more than 30% of an area’s median household income as determined by the federal government, local government, or a recognized national affordability index.

After Repair Value (ARV): The value of a property after repairs and improvements have been made. 

Net Operating Income (NOI): The total income generated by a property minus operating expenses, excluding mortgage payments and income taxes.

Gross Rent Multiplier (GRM): A ratio used to estimate the value of a property based on its rental income, calculated by dividing the property's purchase price by its gross rental income.

Vacancy Rate: The percentage of rental units in a property that are unoccupied at a given time.

Occupancy Rate: The ratio of space rented out or used to the total amount of available space.

Market Value: The price at which a property would sell in a competitive market, determined by factors such as location, condition, and comparable sales.

Due Diligence: The process of thoroughly researching and inspecting a property before making an investment decision.

 

1031 Exchange: A tax-deferred exchange that allows real estate investors to sell a property and reinvest the proceeds into a like-kind property, thereby deferring capital gains taxes.

Amortization: The gradual repayment of a mortgage loan through regular payments, which include both principal and interest.

Real Estate Investment Trust (REIT): A company that owns, operates, or finances income-producing real estate, allowing

investors to invest in real estate without directly owning properties.

Property Management: The operation and oversight of real estate properties, including tasks such as maintenance, tenant relations, and rent collection.

Tenant Improvement Allowance: Funds provided by a landlord to a tenant to make improvements or alterations to a leased space.

Zoning: Government regulations that dictate how land and buildings can be used, including restrictions on property use, density, and building height.

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