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.
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Cash Flow: The amount of money generated from a real estate investment after deducting operating expenses and mortgage payments from rental income.
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Equity: The difference between the market value of a property and the outstanding mortgage balance.
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Appreciation: The increase in the value of a property over time, due to factors such as market conditions and property improvements.
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Acquisition Cost: The total cost of buying an investment property, including mortgage loan fees, closing costs, inspection fees, etc.
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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.
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Depreciation: A tax deduction that allows real estate investors to recover the cost of their investment property over time through annual tax deductions.
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Leverage: The use of borrowed capital (such as a mortgage) to increase the potential return on investment.
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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.
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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.
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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.
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After Repair Value (ARV): The value of a property after repairs and improvements have been made.
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Net Operating Income (NOI): The total income generated by a property minus operating expenses, excluding mortgage payments and income taxes.
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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.
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Vacancy Rate: The percentage of rental units in a property that are unoccupied at a given time.
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Occupancy Rate: The ratio of space rented out or used to the total amount of available space.
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Market Value: The price at which a property would sell in a competitive market, determined by factors such as location, condition, and comparable sales.
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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.
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Amortization: The gradual repayment of a mortgage loan through regular payments, which include both principal and interest.
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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.
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Property Management: The operation and oversight of real estate properties, including tasks such as maintenance, tenant relations, and rent collection.
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Tenant Improvement Allowance: Funds provided by a landlord to a tenant to make improvements or alterations to a leased space.
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Zoning: Government regulations that dictate how land and buildings can be used, including restrictions on property use, density, and building height.