The terms that come up most often in real estate conversations, explained plainly.
Capitalization rate. Net Operating Income divided by property value, expressed as a percentage. The unleveraged annual return. Higher cap rate generally means higher cash yield but often more risk or less appreciation potential.
Gross rental income minus all operating expenses (taxes, insurance, maintenance, management, vacancy reserve) but before debt service. The core operating profit of a property.
Annual pre-tax cash flow divided by total cash invested. Measures the actual return on your invested capital, including the effect of leverage.
Net Operating Income divided by annual debt service. Lenders typically require 1.20 to 1.25 minimum for investment property loans.
Loan amount divided by property value. Banks typically lend up to 75 to 80 percent LTV on investment properties.
The estimated market value of a property after all renovations are completed. The number that determines refinance proceeds in a BRRRR strategy.
Buy, Rehab, Rent, Refinance, Repeat. A strategy for recycling capital through value-add rental properties.
A tax-deferred swap of investment properties under IRS Section 1031. Allows capital gains tax to be deferred indefinitely as long as proceeds are rolled into qualifying replacement properties.
Owner-occupied multifamily ownership. Living in one unit while renting the others, using owner-occupant financing terms unavailable to pure investors.
The tenant pays property taxes, insurance, and maintenance in addition to rent. Maximum passive income structure, common in single-tenant commercial properties.
An investment strategy of acquiring underperforming properties, improving their operations or physical condition, and capturing the resulting increase in value and income.
A group investment structure where a sponsor manages a real estate asset and passive investors (limited partners) provide capital in exchange for a share of returns.
An accounting deduction that allows real estate owners to write off the cost of a building over its useful life (27.5 years for residential, 39 for commercial) against rental income, even while the property appreciates in market value.
An engineering-based tax study that identifies components of a building qualifying for shorter depreciation schedules, accelerating tax deductions in early ownership years.
Purchase price divided by annual gross rent. A quick screening tool, particularly useful for comparing properties within a single market.
The required holding period before a lender will refinance based on the appraised value rather than the original purchase price. Typically 6 to 12 months for conventional refinances.
Large, infrequent expenses on a property that improve or replace major components (roof, HVAC, plumbing) as opposed to routine maintenance.
The arrangement of equity and debt in a real estate transaction, including the priority of each layer in receiving distributions or absorbing losses.