Accessory Dwelling Unit (ADU)
An ADU is a smaller home built on the same lot of land as the primary dwelling. It could be a free-standing structure, such as a guest house, or an apartment built on top of a garage. ADU’s have their own entrance but typically share the same address as the primary home.
An accredited investor is someone who qualifies as a financially sophisticated investor, based on income, assets, or experience, according to SEC guidelines. This status allows investors to hold investments that fall outside the direct oversight of the SEC. The SEC regulates traditional investments like stocks and bonds, but private investments (like real estate syndication) fall outside the SEC’s oversight and require accredited investor status.
An acquisition cost, also referred to as the cost of acquisition, is the total cost of buying an investment property, including mortgage loan fees, closing costs, inspection fees, etc.
Adjustable-Rate Mortgage (ARM)
An ARM is a type of home loan in which the interest rate fluctuates regularly with changing market conditions.
Affordable housing refers to dwelling units that are designed to be economically priced for low-to-moderate-income individuals or families. This is often made possible through government subsidies or special financing programs.
After Repair Value (ARV)
The projected value of a fixer-upper once all the repairs, renovations, and reconstructions are complete.
An agreement in real estate refers to a legally binding contract between two or more parties outlining the terms and conditions of a transaction or arrangement.
Amortization means to spread the value of an asset over a period of time. In real estate, mortgage loans are one example of amortization; the loan balance is spread over the term of the loan, allowing the borrower to pay down the loan balance over time.
Annual Depreciation Allowance
An annual depreciation allowance is a tax deduction that allows property owners to deduct a percentage of the purchase price of an asset over its “useful life” from their income taxes. The useful life is typically determined by the taxing authorities and outlined in a depreciation schedule.
Annual Percentage Rate (APR)
APR is the annual rate of return on your investment, as a percentage of the amount you originally invested.
Annualized returns are investment yields, adjusted to reflect the return based on a 12-month period. The annual return is useful when comparing investments because it allows investors to see how each investment performs over a standard one-year period.
Anticipated Hold Period
The anticipated hold period of an investment is the amount of time an investor plans to own an asset before selling it.
A home appraisal is a process through which a real estate appraiser determines the fair market value of a home. This is often required by a lender in order to ensure that the money being borrowed is a fair amount for the property.
The difference between the appraised value of a property and its accepted purchase price. The appraisal can be higher than the accepted purchase without causing any issues. But if the appraisal is lower than the accepted purchase price, the buyer could have trouble securing financing. The buyer could also request a price reduction from the seller or back out of the deal completely. It’s also possible that the buyer is willing to accept responsibility for the appraisal gap and continue with the deal at the accepted purchase price.
The current value of a property as determined by a licensed appraiser.
Appreciation is an increase in the value of an asset. When you invest in real estate, the goal is for the property to appreciate in value over time, so you get a healthy return on the investment when you sell it. Appreciation depends on a number of factors, including demand, supply, improvements made to the property, interest rates, inflation, and thelocal real estate market.
The value of a property, as calculated by the local Tax Assessor for the purposes of charging annual property taxes. Depending on your local taxing authority, the assessed value could be the estimated current market value or a set percentage of the estimated current market value. Some taxing authorities have caps on how much the assessed value can increase each year. In California, for example, your assessed value cannot increase by more than 2% per year.
An assumable mortgage is a home loan that can be transferred from the original borrower to another party. Sometimes, a seller may transfer their assumable mortgage to a buyer, allowing the buyer to receive favorable terms of the original loan.
A basis point is equal to one one-hundredths of a percent. Basis points are commonly used in real estate as they relate to mortgage interest rates.
Broker Price Opinion (BPO)
A broker price opinion (BPO) estimates a given property’s value, as calculated by a licensed real estate broker. A BPO may be used to determine a property’s value for decisions regarding refinancing, insuring the property, or listing the property for sale.
Broker Price Opinion (BPO) Merge
A broker price opinion (BPO) merge takes value estimates for a single property from multiple real estate brokers to establish a comprehensive valuation of a property. For informal, internal purposes, BPO merges could be used instead of a formal appraisal to determine the fair market value of a property.
The BRRRR Method is a specific real estate investing strategy in which the investor:
- Buys a property,
- Rehabs the property,
- Rents the property out to qualified tenants,
- Refinances the property based on the higher value of the rehabbed and stabilized property, and
- Repeats the process, often using cash from a cash-out refi to finance the next purchase.
Investment properties are divided into four classifications: A, B, C, and D. The building classifications indicate the general condition of a property and the quality of its location, and amenities. It allows investors to determine the value, risk, and profitability of a potential purchase.
Cap rate (also called capitalization rate) is the ratio between the net operating income (NOI) and the purchase price of a property, expressed as a percentage. To calculate the cap rate, divide the NOI by the property purchase price. Example: If you purchase a property for $150,000 with an estimated NOI of $12,000 in the first year, you get a cap rate of 8% ($12,000/$150,000=0.08).
Capital expenditures (often called CapEx) are funds used to purchase, maintain, or update tangible assets. For example, funds used to renovate an existing rental property would be a capital expenditure.
Capital gains are the profits earned on the sale of assets (profits being the money earned from the sale minus the expenses incurred).
Capital Gains Tax
Capital gains tax is the federal and/or state tax paid on profits from investments. For example, if you sell an investment property, you are typically taxed on the profits from the sale in accordance with federal and state income tax laws. Capital gains are typically taxed at a lower rate than normal “earned” income.
A capital improvement is a permanent structural change (including restoration work) completed on a property, which enhances the property’s value.
Cash flow is the way money moves in and out of a company, investment, or account. In real estate investing, cash flow generally refers to recurring net income from property rentals.
The cash-on-cash return is the cash income made on the cash invested in a property, expressed as a percentage. It measures the annual return the investor made in relation to the amount of mortgage paid during the same year. To calculate the cash-on-cash return, divide the annual pre-tax cash flow from the total cash invested.
Cash reserves are money that must be kept available to meet any unexpected or emergency funding needs.
Class A Property
Class A properties are the highest-quality class of property. Class A properties are under 15 years old, built in prime locations, demand high rents, and have little or no deferred maintenance issues.
Class B Property
Class B properties are typically older than class A properties. They are generally well maintained but may have some deferred maintenance issues and value-add opportunities.
Class C Property
Class C properties are over 20 years old with substantial deferred maintenance issues and are likely to be in less desirable locations.
Class D Property
Class D properties are old, in poor shape, and require substantial renovation or even a tear-down and rebuild to be worth investing in.
A clear title means that a property does not have any liens on it, and there is no dispute over ownership.
Closing costs are the expenses required to close escrow on a property. When buying property, closing costs include items like inspections, appraisals, loan fees, title search fees, document filing fees, and prorated property taxes and insurance. When selling a property, closing costs include items like real estate agent fees and any unpaid property taxes or utilities.
Commercial Real Estate
Commercial real estate typically refers to business-related workspaces, such as an office building, shopping center, restaurant, or hotel. However, a residential property consisting of five or more units is also considered a commercial property.
Comparables (also called comps) are properties that are similar to a subject property in terms of size, location, age, and condition. Comps are often used to determine the current market value of a property. Calculating the sales price per square foot of recent comp sales allows analysts to project the value of a given property.
Comparative Market Analysis (CMA)
An analysis done to estimate a home's price based on recent sales of similar properties in the immediate area.
Compound Annual Growth Rate (CAGR)
The CAGR is the mean annual rate of growth for a specific investment or portfolio over a specified period of time. This is a valuable return metric for investments that rise and fall over time because it represents the average annual growth.
Compounded interest is when you earn interest on the interest you have already earned.
In real estate, a contingency is a condition on the purchase of a property. For example, a financing contingency states that the buyer must be able to secure a mortgage to proceed with the deal. Common contingencies include an appraisal contingency, inspection contingency, financing contingency, title contingency, and homeowner’s insurance contingency.
A conventional mortgage is the most popular type of home loan. Unlike other mortgage types, conventional loans can be used for all property types, including investment properties.
Core Real Estate Investments
Low-maintenance properties in great locations that attract high-quality renters with exceptional credit. Learn more
Core+ Real Estate Investments
Moderate-maintenance properties in great locations that attract quality renters with good credit. Core+ investments offer slightly higher risks and greater rewards than Core Investments. Learn more
Real estate crowdfunding is when several people invest in a particular property together, allowing each investor to have a share percentage in the property. Investors are usually connected through online sites. The crowdfunding platform manages the project until completed and distributes profits from the property to investors.
A debt is an amount of money owed to repay a loan balance.
A debt fund is an investment pool that focuses on debt-based securities. Investors in a debt fund loan money to borrowers in exchange for earning a fixed interest rate on the loan.
Debt investing is the general term used for an investment in any debt-based asset. Hard money loans, bonds, and peer-to-peer lending are all examples of debt investing.
The debt-to-equity ratio measures how much of an asset is financed versus how much is owned.
Debt-to-Income Ratio (DTI)
DTI measures the total amount of a household’s monthly debt payments as a percentage of a household’s monthly income.
Depreciation is a tax deduction for owners of income property based on the declining value of the structure over its useful life.
A development is a completed real estate structure. This term is most often used to reference a commercial property or multi-family residential property, but it can also be used to reference single-family homes, particularly when they are of high value.
Digital Real Estate
Digital real estate can refer to online assets, such as domain names, websites, or digital businesses, that can be bought, sold, or rented. In more recent years, it has become synonymous with “virtual real estate,” which refers specifically to plots of digital land and digital structures in virtual reality “Metaverses.”
In real estate, diligence typically refers to the research and analytics conducted prior to committing to purchase a specific property. This is also commonly called “due diligence.” Getting a property inspection, appraisal, and land survey are examples of diligence.
A measurement used to estimate the current value of an income-generating property based on future cash flows from rental income. See “Discounted Cash Flow Analysis” for more information about how a discount rate is used.
Discounted Cash Flow (DCF) Analysis
A mathematical model used to determine the potential profitability of an investment project based on the present-day value of future cash flows. The value of money is affected by time through inflation and deflation, so to determine the viability of long-term real estate investments, the experts at Gatsby use DCF analysis to calculate how much future rental income will be worth in today’s dollars.
In the context of real estate investments, distributions are the periodic payments made to investors from the income generated by a property or portfolio. These payments could be paid out as dividends, interest, or rental income.
The process of allocating capital into different investments to reduce a portfolio’s overall risk.
A dividend is a regular payment made to shareholders. Dividends are typically paid from the profits made by a company over a given period, but they can also be paid from a company’s reserve funds.
A dividend yield is a profitability metric to determine the return provided by a dividend-producing stock. Dividing the dividend per share by the price you paid per share will give you your dividend yield.
Dollar Cost Averaging
Dollar cost averaging is an investment method in which you invest a fixed dollar amount into a given investment on a regular basis, regardless of fluctuations in the price of the stock.
A down payment is the amount of the purchase price that must be paid upfront to buy a piece of real estate.
Downside protection is a risk management strategy designed to minimize potential losses from a real estate investment.
Due diligence is the research that a reasonable person is expected to complete before making a big decision like purchasing a property or entering into a contract.
Earnest money is the amount a property buyer will pay upfront as a deposit to hold the property during the contract period. This amount shows the seller that the buyer is serious about purchasing the property. It may or may not be refundable, depending on the terms of the contract.
Effective Gross Income
Effective gross income (EGI) is the total income generated by a property after deducting vacancy losses and losses to due unpaid rents. EGI can also be referred to as property revenue.
Entitlements are the governmental approvals needed in order to build commercial real estate.
Equity is the value of an asset (like a real estate investment), minus the amount still owed in the financing of that asset (like a mortgage).
An equity multiple measures the rate of return on an investment based on distributions received. To calculate the equity multiple, divide the total amount distributions received by the total capital invested.
Escrow is when a third party holds money on behalf of two parties engaged in a deal. In real estate, escrow is opened with an escrow company as soon as a property is under contract. The escrow company will hold the money on behalf of the buyer and seller until the transaction is completed, at which point the escrow company distributes the cash to the appropriate parties and escrow is closed.
An escrow agent is a third-party representative who holds funds in an escrow account while a deal is being made between a buyer and seller. For example, in a real estate purchase, buyers are expected to place an “earnest money deposit” with an agreed-upon escrow agent upon getting a signed purchase agreement with the sellers. The escrow agent holds these funds and distributes them to the appropriate party, as outlined in the purchase agreement.
Estimated Total Cash Return
Estimated total cash return is a profitability metric that calculates the total expected amount of cash generated from an investment property over a specific period of time minus all property expenses. The calculation includes all estimated value-adds, such as rental income, tax benefits, and potential appreciation.
Estimated Total Gain
Estimated total gain is the projected profit or increase in value that an investor expects to see from an investment property. This calculation takes factors like purchase price, estimated sales price, income, and expenses into account.
In investing, equity is the value of the share of an investor's stake in an asset.
An equity fund is an investment pool in which investors receive an ownership stake in the asset. Real estate syndication is an example of an equity fund; investors pool their capital and share ownership in the real estate development.
Equity investing is the general term used for any investment in which the investor shares in the ownership of assets. Currencies, preferred shares of company stock, and real estate syndication are all examples of debt investing.
Fair Housing Act
The Fair Housing Act is legislation that prohibits discrimination in housing based on protected classes, such as race, nationality, color, religion, sex, familial status, or disability.
Fair Market Value (FMV)
The price a property is worth on the open market at a given point in time. This is the value that a reasonable buyer would pay, and a reasonable seller would accept if neither party were under pressure to buy or sell and neither party is under any obligation to the other.
FHA financing refers to FHA mortgage loans, which are home loans backed by the US Federal Housing Administration. FHA loans are often used by first-time buyers as a means of accessing down payment options as low as 3.5% with slightly relaxed credit score requirements (compared to conventional loans).
For Rent by Owner (FRBO)
For rent by owner (FRBO) refers to rental properties that are leased directly by the property owner, without the involvement of a real estate agent or property manager.
For Sale by Owner (FSBO)
FSBO properties are listed for sale directly by the property’s owner, without involving a real estate agent or broker.
Fractional ownership is when multiple investors join funds to purchase a high–value asset, like a property. Fractional ownership can be entirely financial (meaning that each investor is entitled to their share of the rents), entirely useful (meaning that each investor could access their share of the property - perhaps with each investor in a multi-family deal having full access to a unit of their own), or a combination of financial and useful.
The percentage of the property purchase price that will be funded by a lender, such as a bank.
A fixed-rate mortgage is a type of home loan in which the interest rate is locked in for the term of the loan.
Flipping is a real estate investment strategy of purchasing a property, renovating it quickly, and reselling it immediately.
Fund of Funds
A fund of funds is when one fund (any entity that pools money from multiple investors to purchase assets) invests in another fund.
A general partner is an individual or company responsible for making decisions relating to the management of a shared asset.
Gross Operating Income (GOI)
Gross operating income (GOI) is the total income generated by an investment property (including rent as well as separate revenue sources like parking or laundry) before deducting operating expenses (including maintenance costs, property taxes, insurance, and vacancy losses).
Gross profit is the total money made on the sale of an asset minus the cost of purchasing the asset.
Gross Rental Yield (GRY)
Gross rental yield (GRY) measures rental property returns by dividing the annual rental income generated from the property by the property’s purchase price or current market value.
Gross Scheduled Income (GSI)
Gross scheduled income (GSI) is the total potential rental income a property could generate if it were fully occupied and operating at maximum capacity.
The gross yield of an investment is the total amount earned before taxes and expenses are deducted. It is expressed as a percentage of the investment amount. To calculate gross yield, divide the annual return on your investment (before taxes and expenses) by the current price of the investment.
The growth rate is the rate at which you expect an asset to increase in value. In real estate, the growth rate can refer to annual rent increases or to property appreciation.
HOA (Homeowner’s Association) fees are dues paid by property owners who live in a given subdivision, condo complex, or planned community. HOA fees typically cover the cost to maintain items like common areas, amenities, private roadways, and the exteriors of shared structures.
The hold period of an investment is the actual amount of time an investor owns an asset before selling it.
Homeowners Association (HOA)
A homeowners association is an organization of local property owners. These organizations require membership from all property owners within the HOA’s geographic reach, and they collect dues from members for the purpose of keeping the area well-maintained.
Home Equity Line of Credit (HELOC)
A HELOC is a debt instrument used by property owners to convert some of the equity they have in their property into cash. HELOCs work similarly to credit cards; the borrower has an active line of credit that they can borrow against as needed. But, unlike a credit card, HELOCs are secured by real estate. This means borrowers can get a lower interest rate with a HELOC, but it also means that they risk foreclosure if they fail to repay their HELOC debt.
A home inspection is a professional evaluation of the physical condition of a property.
A hotel is a commercial property that provides lodging and accommodation services to guests for short-term stays.
House hacking is when a property owner finds a way to generate income from their residence. One example of house hacking is building an accessory dwelling unit (ADU) on your property, which you can rent out for passive income.
In the context of real estate, income is the amount of money generated from a property. This is typically through rents collected for the units, but can also include other sources, such as parking fees or laundry facility income.
Income-producing assets are any items of value that generate cash flow. Rental properties, for example, are income-producing assets because they generate rental income.
An income property is any property that generates cash flow. This could be a residential apartment building, retail space, or a single-family home that is rented out.
Industrial Investing Entity
An industrial investing entity is a company or organization that focuses on investing in properties classified as industrial real estate. This investment class includes warehouses, distribution centers, manufacturing plants, and other properties used for industrial activities.
Inflation is an increase in prices or expenses over time.
The initial investment is the upfront cash required to purchase an asset. For individual real estate investors, the initial investment may include a property’s down payment, closing costs, and renovation expenses.
An inspection contingency is a condition of a home purchase contract which stipulates that the deal is dependent on a satisfactory home inspection. With an inspection contingency, the buyers could back out of the deal during a certain timeframe without penalty if there are issues on the home inspection report that the buyers are not comfortable with.
An inspection report is a document that details the condition of the property, as reviewed by a licensed inspector.
The interest rate is the cost of borrowing money, expressed as a percentage of the loan amount.
Internal Rate of Return (IRR)
IRR is a metric used to measure the potential profitability of investments. IRR used a discounted cash flow analysis, in which the net present value (NPV) of all cash flows is set equal to zero. This method ignores external factors like inflation and the cost of capital.
An investment property is any piece of real estate purchased with the intention of generating returns. These returns could be recurring rental income, proceeds from the future sale of the property, or both.
Investment Waterfall (Distribution Waterfall)
The investment waterfall (also called a distribution waterfall) is the method of passing profits or losses along to investors in such a way that the investment sponsor takes the brunt of the risk in the investment. Waterfalls can be structured in different ways and will be clearly outlined in the terms of your investment agreement.
Landlord insurance is a type of property insurance that covers rental property structures in case of damage from fire, weather, or vandalism. It also provides coverage for injuries that take place on the ground of a rental property.
In real estate, a lease is an instrument used to convey rights of occupancy to a party other than the owner for a set period of time, in exchange for a specified rental amount.
Leverage is the use of borrowed capital (debt) to increase the potential return of an investment.
Leveraged return is the return on investment (ROI) achieved by using a loan to finance an investment. By using borrowed capital, investors can increase their returns as long as the return on the investment exceeds the interest rate of the loan.
A limited partner is an individual or entity that invests in a partnership but has limited liability and limited responsibilities. Limited partners typically do not participate in the day-to-day management of the business or investment.
Liquidity is the ease with which an asset can be converted to cash. Intangible investments like mutual funds, stocks, and bonds are highly liquid while tangible assets like real estate and collectibles are less liquid.
In real estate, an LLC (Limited Liability Company) is a legal entity that allows investors to buy and own real estate. Rather than owning the real estate in one’s own name, the real estate is owned by the LLC, which limits the liability of the owner(s).
Loan-to-Cost (LTC) Ratio
The loan-to-cost ratio compares the cost of financing a new real estate development with the cost of building a new development. This is used to determine the risk involved in issuing a construction loan to a real estate developer. The LTC ratio is calculated by dividing the loan amount by the total estimated construction cost.
Loan Origination Fee
A loan origination fee is a charge levied by lenders to cover the administrative costs of processing a loan application and issuing the funds. Loan origination fees are typically a percentage of the loan amount, paid by the borrower at closing.
Loan-to-Value (LTV) Ratio
The loan-to-value ratio shows how much of a property is financed as a percentage of the property’s current value. LTV is used to calculate the equity in a property, which is needed when refinancing a mortgage loan. LTV is calculated by dividing the loan balance by the current fair market value of the property.
A long-term rental is any property, or unit within a property, that is rented out via lease contract for a substantial time. There is no set period that defines “long-term,” but many investors consider leases of 12 months or longer as long-term.
LTV is a financial ratio that represents how much of a property's value is financed through a mortgage loan.
A management fee is the amount charged by a company in exchange for the day-to-day management of an asset. Property managers, for example, typically charge a percentage of the rental income in exchange for finding qualified renters, collecting rent, and addressing maintenance requests.
Market value is the price an asset will command on the open market. This is the price that a reasonable buyer will pay, and a reasonable seller will accept.
A mixed-use building is a structure that contains different property types under one roof. A common example of a mixed-use building is an apartment building in which the ground floor is comprised of retail storefronts.
A mortgage is a type of loan used to purchase real estate. The borrower agrees to pay the lender over time, and property serves as collateral to secure the loan.
Mortgage Insurance Premium (MIP)
A MIP is the cost of maintaining a mortgage insurance policy. Mortgage insurance is used to provide protection for the lender in the event that the borrower defaults. Many lenders require mortgage insurance for borrowers who put less than 20% down on a property.
A mortgage loan is a loan used to finance the purchase of a property. In most cases, mortgage loans are “secured” to the property, meaning that the property is used as collateral for the loan. Under this arrangement, it is possible for a lender to foreclose on the property if the borrower fails to repay the loan.
A multi-family home is one building that contains several individual units, providing a living space for multiple families. Each unit has its own address. A home with two to four units is considered to be residential multi-family, while one with five or more units is considered to be commercial multi-family.
Net Cash Flow
Net cash flow is the recurring income generated by an asset after expenses are paid. For example, if you have a rental property generating $4,000 per month in rental income, and your monthly expense for that property is $2,500, your net cash flow is $1,500 per month.
The net profit is the amount earned after all expenses are paid. Net profits are calculated by subtracting all expenses related to an investment from the total revenue of the investment.
Net Operating Income (NOI)
Net operating income (NOI) is the income that is generated annually from an investment property after you deduct the property expenses. NOI is calculated by subtracting operating expenses from income.
Net yield represents the actual return on investment after deducting all expenses and costs associated with the investment.
A non-recourse loan is a loan secured by an asset, which is to be used as collateral in the case of default. In a non-recourse loan, the lender cannot seek additional compensation outside of the collateral. As an example, mortgages are typically non-recourse loans, secured by the home. If the owner defaults, the lender may foreclose on the property, but may not seek additional damages from the borrower.
An office is a commercial real estate space for conducting business activities and administrative work.
Operating expenses in real estate are the costs associated with running a property. These costs include insurance, utilities, property taxes, property management fees, repairs, and maintenance.
Opportunistic Real Estate Investments
Heavily financed new development projects, built from the ground up. Opportunistic investments are riskier than Core, Core+, and Value-Add Investments, but come with the potential for higher returns. Learn more
An opportunity zone is a designated geographic region that the US government has identified as needing economic development. The purpose of these zones is to incentivize investors to build up struggling areas and create jobs to help stabilize the local economy. There are tax benefits to investing in opportunity zones.
Ordinary income is a tax-related term used to classify any income that is taxed at standard rates (as opposed to income that is taxed at special rates, like long-term capital gains). Ordinary income can be wages, salaries, commissions, rents collected, tips, bonuses, or interest.
Oversubscription is when the demand for an investment opportunity, such as a real estate fund, exceeds the available supply of shares.
Pari passu is a Latin term meaning "equal footing." In real estate, it refers to the equal ranking of multiple loans on a property, giving each loan the same level of priority in repayment.
Passive income is the general term for money earned without trading your time for pay. In real estate, rental income is considered passive income because the rents collected do not require you to invest a certain amount of time or work on the properties. Interest income is another common form of passive income in real estate. And with a real estate syndicate like Gatsby, all investment income can be considered passive because Gatsby handles all the renovation/development/management for you.
Pass-through taxation is when a business entity does not pay taxes; instead, the income is “passed through” to the business owners, who report the income on their personal income tax returns.
In real estate financing, points are upfront fees a buyer can pay the lender to reduce the interest rate on a mortgage loan. While the terms can vary, one point typically costs 1% of the loan amount and reduces the interest rate by a quarter of a percent.
In investment terms, a portfolio refers to the total holdings of an investor. A portfolio should be made up of investments from different asset classes, including stocks, bonds, and real estate.
Pre-approval is when a home buyer has a lender review their finances to confirm that they qualify for a mortgage loan. Through the pre-approval process, the lender will also determine how much the buyer is qualified to borrow.
A preferred return refers to the rate of return that preferred investors are guaranteed before other investors receive their share of the profits. For example, a real estate deal might offer a preferred return of 12% to preferred investors. These investors would be entitled to their 12% before the remaining profits would be distributed among the other investors.
Pre-qualification is when a mortgage lender asks a potential homebuyer some basic financial questions to determine if it is likely that they could qualify for a home loan. This is different from a pre-approval, which is when a lender reviews your income, financial statements, and credit to confirm that you can qualify for a loan and determine the amount you can borrow.
In real estate finance, principal refers to the original amount of money borrowed in a loan, excluding interest charges and other fees.
Principle reduction refers to the decrease of a loan balance over time as payments are made by the borrower.
Private Mortgage Insurance (PMI)
PMI is an insurance policy that provides protection for a mortgage lender in the event that the borrower defaults. Many lenders require PMI for borrowers who put less than 20% down on a property.
Pro forma is Latin, meaning “as a matter of form.” In real estate, pro forma is commonly used to describe a form real estate investors use to itemize income and expense projections for an investment property.
Profit is revenue minus expenses. In real estate investment, profit is a property’s sales price minus all the expenses associated with buying, holding, and selling the property.
Projected Annual Appreciation
Projected annual appreciation is the estimated increase in the value of a property over a specific number of years, typically expressed as an annual percentage.
Property insurance is the general term for an insurance policy that helps protect the property owner against the damage or destruction of the property from forces like fire or weather. Homeowner’s insurance and landlord insurance are both types of property insurance.
A property manager is a person (or company) responsible for overseeing the day-to-day operations of an income-producing property. Responsibilities typically include finding qualified tenants, collecting rents, handling property maintenance, drafting leases, and negotiating renewals.
Property management is the day-to-day oversight of income-producing real estate (such as single-family rental properties or multi-family apartment buildings). Property management includes marketing the property for rent, screening tenants, drafting leases, collecting rents, handling maintenance issues, negotiating lease renewals, addressing renter issues, and processing move-ins and move-outs.
Local taxes levied on property owners, typically based on a percentage of the property’s value. These taxes pay for local services, including schools, infrastructure maintenance, police departments, and fire departments.
Allocating an expense or return over an appropriate portion of time. For example, if you enter a 12-month investment in month two, your returns would be prorated based on the 10 months that you were an active investor in the project.
A purchase agreement is a contract for the expected transfer of a property. The buyer and seller outline their intentions for the transfer of the property, including price, terms, and contingencies.
Ready-to-Issue (RTI) Permit
RTIs are the permits needed in order to build residential real estate in Los Angeles County.
Real Estate Agent
A real estate agent is a licensed real estate professional, authorized by the state to represent buyers and sellers in real estate transactions.
Real Estate Fund
A real estate fund is a specific type of mutual fund, which invests in real estate-based securities like REITs.
A company that invests in income-producing properties and shares a portion of the proceeds with investors in the form of dividends.
Real Estate Owned (REO)
REO refers to properties that have been acquired by a lender through foreclosure. The term comes from the accounting line item used to record these holdings in the lender’s books.
Similar to crowdfunding, real estate syndication is when multiple people invest in a property together. With your money pooled, you can access higher-value projects that would otherwise be out of reach. A real estate syndication has a syndicator/sponsor that is in charge of finding, purchasing, managing, and selling the property, so the investors can benefit from the ownership without doing any of the work related to the investment. Unlike traditional crowdfunding, the investors of a syndication project own a stake in the underlying real estate.
Refinancing is when the existing mortgage is replaced with a new mortgage under more favorable terms. Refinancing is often used to get a lower interest rate or turn a property’s equity into cash-in-hand through a cash-out refinance.
Regulation D outlines exemptions from SEC regulation requirements for companies who wish to raise private capital by offering private securities (like equity shares, for example).
In real estate, rehabilitation refers to an extensive renovation of a property in need of repairs and updating.
Remote investing is when a real estate investor invests in properties outside of their local market. This could mean investing in a national or global portfolio or it could mean purchasing a rental property out-of-state.
A rent increase is when the rental rates on a given property go up compared to prior months or years. Rent increases can be expressed as a dollar amount (i.e. the rent increase will be $200 per month) or a percentage (i.e. the rent increase will be 5%).
Rent To Own
In real estate, rent to own is an arrangement in which an individual rents a property with the intention of purchasing the property. A rent-to-own agreement is negotiated between the current property owner and the renter/buyer to provide a path to property ownership for someone who might not be financially able to buy the property immediately.
Rental income is the money landlords or real estate investors receive from tenants in exchange for their use of the property.
Repair and Maintenance Expense
Repair and maintenance expense is the ongoing cost of repairing and maintaining a rental property to keep it functioning properly. Property owners should have a reserve set aside to cover these costs, which can include everything from regular landscaping to replacing the roof as needed.
Residential Real Estate
Residential real estate is any property that is zoned for single-family homes or multi-family homes of up to four units. Multi-family homes of five or more units are considered commercial real estate rather than residential real estate.
Retail spaces are commercial properties used for selling goods and services directly to consumers.
A retail investor is a non-professional individual who buys and sells assets through a brokerage. This term is most often used when referring to investments in securities (like stocks and bonds), rather than applying to real estate investors. However, as some real estate investors (like REITs and ETFs) are securities rather than real property, investors who hold assets in these real estate securities could be called retail investors.
Return on Investment (ROI)
Return on Investment (ROI) is your profit, expressed as a percentage of the amount you invested. To calculate your ROI, divide your net profit by your total investment amount.
Return (more commonly called profit) is revenue minus expenses. In real estate investment, profit is a property’s sales price minus all the expenses associated with buying, holding, and selling the property.
A reverse mortgage is a financial agreement in which a homeowner borrows a percentage of their home’s equity from the lender every month. This is typically available only to homeowners who are 62 or older and have paid off their original mortgage. The total amount of the loans plus interest will need to be repaid when the owner sells the house, permanently leaves the house, or passes away.
An ROI calculator is a tool used to calculate estimated or actual returns on an investment.
SEC Rule 506c
SEC Rule 506c allows organizations to solicit the general public for investments that are not regulated by the SEC as long as the organization meets certain requirements
. These requirements include making reasonable efforts to verify that all investors are accredited.
Section 8 refers to Section 8 of the Housing Act of 1937, which addresses rent assistance for low-income households. The Section 8 assistance program consists of government-funded vouchers, paid on behalf of qualified renters to landlords in lieu of rent.
Securities and Exchange Commission (SEC)
The SEC is an American government agency, intended to protect investors by regulating certain investment types like stocks, bonds, and mutual funds.
A security deposit is a specified amount of money paid by a tenant to a landlord before moving in. It serves as financial protection for the landlord in case the renter damages the property or breaches the lease agreement.
Self-Directed Individual Retirement Account (SDIRA)
An SDIRA is a specific type of individual retirement account in which the account holder retains complete control over their investment options. Rather than limiting their retirement investments to publicly-traded securities, SDIRA holders can invest their retirement funds in alternative investments like real estate, precious metals, and tax liens.
A self-directed Individual Retirement Account (IRA) is a tax-advantaged account that allows the account holder to have more control over their investments. Rather than only investing in traditional securities like stocks and bonds, self-directed IRAs can also hold alternative investments, including real estate.
Self-storage properties are facilities that provide rental storage space to individuals or businesses for keeping their belongings or goods.
Seller concessions are incentives that sellers offer to make their listings more appealing to buyers. In most cases, concessions are financial; sellers might offer to cover a buyer’s closing costs or reduce the price so the buyer can make necessary home repairs, for example. But concessions can also apply to terms; agreeing to a quick close with a cash buyer could be considered a concession.
Senior housing refers to residential communities designed to accommodate the needs of older adults. Some senior housing facilities offer assisted living services, such as meals and medical care on-site.
A Series LLC is a legal structure that allows for the creation of multiple individual LLCs that relate to one another. For example, a real estate investment company may have a series LLC in which each property has its own LLC ownership entity.
A short sale is when a property owner sells a property for less than the amount owed on the mortgage. This can happen when markets experience an extreme, sudden drop in property values. It is typically advantageous for the owner to simply wait for the market conditions to improve. But if the owner is unable to make the mortgage payments, a short sale is preferable to foreclosure. Importantly, the lender must approve the short sale before the transaction can be completed.
A single-family home is a structure with a living space intended for only one household. Single-family homes have one address.
A single-family rental is a one-household property that is rented to tenants.
A sponsor is a person or organization responsible for managing a real estate syndicate. This entity will purchase the real estate on behalf of the investors, manage the renovation or development, oversee any ongoing management of the property, handle the sale of the property at the appropriate time, and make disbursements to the investors as appropriate.
A squatter is an unauthorized occupant of a property.
Squatters' rights (also known as adverse possession laws) are the legal rights of individuals who occupy someone else's property without permission or legal title for an extended period of time. Squatter’s rights laws vary by state and can provide certain protections for long-term residents to remain on the property or even have an ownership claim to the property.
Subsequent months are the months following a given event. For example, a rental agreement might note a reduced rental rate for the first month, followed by the full rental price for subsequent months.
Systematic risk, also known as market risk, is the inherent risk associated with investing.
Tenant screening is the process of reviewing rental applications and conducting additional due diligence (like credit checks, background checks, or reference checks) to find well-qualified tenants for a rental property.
In real estate, a term most often refers to a contracted period of time. For example, conventional mortgages might come in a 15 or 30-year term. As another example, real estate investments might be offered in a five-year term.
A method of deferring taxes on investment profits by rolling the profits directly into a new investment project.
Title insurance is an insurance policy that protects buyers and sellers from unexpected ownership claims made on a property by third parties.
A title report is a written document showing the known chain of ownership of a property, including claims against the property by any third parties that can be identified by a title company.
The total return of an investment factors in both the appreciation increase of the asset since the last return period, as well as the cash flows generated by the asset over the period.
A turn-key property is a property that is ready to receive occupants immediately; no renovations or modifications are needed prior to move-in.
The 2% rule is a guideline used to assess the potential profitability of a rental property investment in terms of cash flow. According to this rule, the monthly rental income should be at least 2% of the property's purchase price.
Underwriting is the process of analyzing the financial risk of loaning funds to a borrower.
Vacancy provisions are the reserve funds set aside by property owners to account for inevitable periods during which a unit will be unoccupied. These periods of vacancy happen when a resident moves out and the unit needs to be made ready for the next tenant. It can also occur when a unit is taken off the market for renovation. In each case, the vacancy provision covers the vacancy loss during the unoccupied period.
A vacancy rate is a metric that measures a lack of paying tenants. In the case of multi-family properties, vacancy rates are expressed as a percentage of units that are without a paying tenant. For example, a 10-unit structure with 9 occupied units would have a 10% vacancy rate since one unit is unoccupied. Vacancy rates can also be expressed as a percentage of time that a property is without a tenant. To calculate the vacancy rate in terms of time, divide the number of days a property is not occupied by the total number of days in the period (the period could be a month, quarter, year, or total amount of time an asset was held).
A vacation rental is a property that is rented out on a short-term basis, typically to vacationers. These rentals typically have a higher vacancy rate than long-term rentals, but they also command a higher nightly rental rate.
Valuation is the general term for determining the current value of a property. Valuations are typically based on one of three methods: sales of comparable properties, income generated by the property, or the cost to replace the property. A formal valuation, conducted by a licensed professional, is called an appraisal.
Value-Add Real Estate Investments
Properties in growing neighborhoods that offer distinct transformation potential. Slightly riskier than Core and Core+ Investments, Value-Add Investments offer the potential for greater returns. Learn more
Wholesaling is a real estate investment strategy in which the investor gets a property under contract, then sells the purchase contract to another buyer. The difference between the price the investor agreed to pay and the amount the eventual buyer paid is the profit.
A yield is the income or return generated by an investment, usually expressed as a percentage of the property's value or investment cost.
Zoning dictates what kind of structure can be built on a given lot. A large apartment complex, for example, cannot be built on a tract of land zoned for single-family homes.