Real Estate Investment Terms Made Simple

This refers to housing programs like Section 8, rent-stabilized housing, and rent control, where government assistance helps tenants pay a portion of their rent, while the government covers the remainder.

A property interest referring to the airspace above a property. Developers may purchase and transfer air rights from adjacent properties to build higher structures.

A term used to describe a property, typically referring to its overall value and potential. For example, “Where is the asset located?”

A way to describe interest rates or fees, where 1% of the loan amount is equal to 1 point, or 100 basis points (bps). Example: "The broker asked for 50 bps."

A short-term loan used to purchase or refinance properties quickly. It acts as a temporary financial solution, often refinanced later with a longer-term loan.

A real estate investment strategy that involves purchasing properties, renovating them to increase their value, renting them out for steady cash flow, refinancing to pull out equity, and repeating the process. The goal is to build a sustainable portfolio of rental properties by leveraging the equity from previous investments to finance future ones, allowing for continual growth without using additional capital.

A strategy where investors purchase properties with the intention to rent them out and retain them over the long term, benefiting from both immediate cash flow and future appreciation.

A financial metric used to estimate the profitability of a real estate investment by dividing the property’s net operating income (NOI) by its market value. It helps investors gauge the time it will take for the property to pay for itself.

Refers to the estimated cost of improvements or renovations to a property, such as major repairs, extensions, or upgrades.

Tax applied to profits from the sale of assets held for over a year, with rates varying based on the taxpayer’s income bracket. Short-term capital gains (assets held for less than a year) are taxed as ordinary income.

A mortgage strategy where a borrower replaces their existing mortgage with a new, larger one and takes out the difference in cash. This can help improve loan terms or provide additional funds for other investments.

The expenses incurred by buyers during the purchase of a property. These costs typically include appraisal fees, title insurance, attorney fees, and others.

An analysis conducted by real estate agents or online tools to estimate the market value of a property based on the sale prices of similar properties in the area.

Real estate that is used for business purposes, such as office buildings, industrial sites, or retail centers, distinct from residential properties.

A short-term loan designed to finance the building or renovation of a property, typically lasting between 18 and 36 months.

Refers to the process of changing the use of a building, such as converting an office building into multifamily housing.

A numerical representation of a borrower’s creditworthiness, used by lenders to assess the risk of lending.

The period during which a buyer performs research on a property to uncover any potential issues. This typically occurs in the first 10-30 days of a real estate contract.

A type of real estate financing primarily used by investors, where the loan approval is based on the property's ability to generate enough income to cover the debt payments. The Debt Service Coverage Ratio (DSCR) is a key metric used in this type of loan, calculated by dividing the property's net operating income (NOI) by the total debt service (loan payments). A DSCR of 1 or higher indicates the property generates enough income to cover the debt, making it an attractive option for investors who may not have a traditional income or strong credit score, as the focus is on the property's income-generating potential rather than personal financial history.

Represents ownership in a property or business. It is calculated by subtracting liabilities from the total value of assets.

The estimated value at which a property would sell in an open market under normal conditions.

A legal process where a lender takes ownership of a property after the borrower fails to make mortgage payments. These properties are often sold at auction, sometimes at discounted prices.

A category for properties being sold directly by the owner without the involvement of a real estate agent or broker.

A designation granted by the National Association of Realtors to real estate professionals who have completed advanced educational requirements, signaling a commitment to high professional standards.

A ratio used by investors to estimate the profitability of a rental property by comparing its price to the annual rental income it generates, before expenses.

A percentage that indicates the annual rental income relative to the total cost of a property, helping investors assess the potential return on investment.

A metric used to estimate an investment’s profitability by predicting the rate of return based on expected growth, often calculated using a financial formula.

A metric that tells an investor the likelihood of recovering their investment in the event of a default by the borrower, expressed as a percentage.

A second-position loan used in real estate transactions to finance property acquisitions or expansions. It sits behind senior loans in the capital structure.

Refers to residential buildings with five or more units, such as apartment complexes, that are used for housing rather than commercial purposes.

The income generated by a property after subtracting operating expenses, excluding taxes and financing costs. It is a key figure in determining a property’s profitability.

The total value of a person’s or organization’s assets minus liabilities. It reflects the financial standing of a property investor or sponsor.

A document created by the seller’s broker outlining the details of a property, including proforma financial projections, used to market the property to potential buyers.

A document outlining an individual’s or sponsor’s financial position, including assets, liabilities, liquidity, and net worth. It may also list real estate holdings.

An evaluation to identify potential environmental hazards at a property that could affect its value or pose liability risks.

An investigation that follows Phase I ESA, involving the testing of soil, soil gas, and groundwater for contaminants if potential environmental concerns are identified.

The four components that make up a standard mortgage payment. Lenders typically require PITI payments to be below a certain percentage of the borrower’s income.

Equity financing provided in a real estate venture, typically in a subordinate position to mezzanine financing, giving the preferred investors priority in profit distribution.

A profit-sharing preference where certain investors receive their share of profits before others, up to a specific return rate, from the operation, sale, or refinancing of an asset.

An assessment conducted by a certified appraiser to determine the current market value of a property, considering factors like location, condition, and comparable sales.

A partnership between two or more investors to work together on a real estate project, sharing both risks and rewards.

A legal structure for real estate investing that limits personal liability and offers tax advantages by treating the property as a separate entity.

An entity that owns and manages real estate assets, with the goal of generating income for investors.

An individual who secures a property under contract and assigns that contract to another buyer for a fee, without ever taking ownership of the property.

The process of rebuilding or repurposing an existing property or site, often involving the demolition of old structures and replacing them with new, more valuable ones.

A report that lists all the rental units in a multifamily property, detailing the unit number, tenant name, monthly rent, and other relevant details.

A term used to describe properties that have been foreclosed and are now owned by the lender, typically sold at auction or via private sale.

A primary mortgage or lien that takes precedence over other debts in case of default. Senior loans are typically the first to be paid in case of liquidation.

Refers to the non-physical costs associated with construction or renovation, including planning, permitting, and legal expenses. These usually comprise about 5-10% of the project’s total cost.

A list of all real estate properties owned by a sponsor, including details such as address, debt, units, and other relevant information.

A property that is fully leased and generating stable income, often referred to as a "stable" or "income-generating" asset.

A lease agreement where the tenant agrees to pay for all property expenses, including taxes, insurance, and maintenance costs, in addition to the rent.

The expected annual return on a real estate investment based on projected rental income, property value appreciation, and other factors.

A real estate investment approach focused on buying underperforming properties and improving them to increase their value, often through renovations or changes in management.

Local government regulations that determine how land and buildings can be used. Zoning laws can designate properties for residential, commercial, industrial, or mixed-use purposes.