It’s easy for new real estate investors to get intimidated with the different terms and acronyms used in the real estate industry. Getting yourself familiar with these real estate investing terms is essential to succeed in this business. We spoke with experts who shared the most important real estate terms every investor should know.
Here are the top 25 real estate investing terms you need to know, straight from the pros.
Louis Swingrover, Founder & CEO, 1031Gateway
A real estate investor can defer the capital gains taxes that would be due as a result of the sale of a property if they reinvest the proceeds from that sale into another investment property in compliance with certain rules. These rules are found in section 1031 of the Internal Revenue Code, so this tax-deferral mechanism is often called the “1031 exchange.” The 1031 exchange is a powerful, centuries-old wealth preservation tool that continues to be utilized by millions of middle and working-class Americans. Standard economic modeling predicts that if it were ever compromised, the results could be devastating to the United States economy as a functional whole.
Ralph DiBugnara, President, Home Qualified
Typically, the debt service coverage ratio (DSCR) is used by a bank or a lender to calculate the income vs expenses on an investment property. The DSCR shows the ratio of expenses the property is carrying compared to its gross income. A lender will always want to make sure there is enough income coming in to cover the new debt.
Jerryll Noorden, CEO, We Buy Houses In Connecticut LLC
A comparative market analysis (CMA) is the way of comparing similar properties within the same area to determine its value. This is something a real estate agent does best. When an agent performs a CMA, they will hop onto the multiple listing service (MLS) and select houses that are very comparable to your property. In other words, they select a list of houses that are as similar to the subject home as possible to analyze, determine, or verify the house’s as-is value and/or the after repair value.
Lucy Armentrout, AICP, LEED AP, Real Estate Broker, Red Oak Realty – Fine East Bay Homes
This term is commonly used by residential real estate agents in establishing and supporting list and sales prices for multifamily properties. The gross rent multiplier (GRM) is the figure derived by dividing the property price by the annual rental income figure. For example, a $1.3 million sale price on a triplex, which yields $4,600 a month or $55,200 per year has a GRM of 23.55. Your agent may explain investment properties to you purely in terms of GRM, and that’s as far as many agents will take their pricing analysis. GRM does not reflect all of the costs and benefits of ownership. If you have additional income from on-site, coin-operated laundry facilities, that is not reflected in GRM. Likewise, GRM does not reflect common ownership expenses such as property taxes, business licenses and taxes, maintenance costs and insurance. It’s often a useful tool for an initial “reality check” as you’ll want to be sure an investment property is selling for a GRM within the range commonly seen for comparable properties in your market. GRM is a tool many smaller investors use.
5. The Difference Between Raising Money & Financing
Joe Fairless, Co-founder, Ashcroft Capital
It’s important to gain an understanding of the difference between “raising money” and “financing” as they relate to real estate investments. These terms will determine how you fund your deals. Raising money includes marketing to potential investors via cold calls, emails, and diligent networking. Financing, however, means finding a bank, lender, or other financial institution that will loan you the money you need to make the initial investment. Your unique business strategy will determine which of these you choose.
6. Skin in the Game or Down Payment
Edwin D. Epperson III, President, Vertical Fund Management Corp
This is industry lingo to metaphorically describe how much “risk” a real estate investor is willing to put toward their project. In every case, this risk of the borrower is translated to dollar amount the investor is willing to put down on a property. The reason it is seen as risky is because a borrower’s down payment will be the first amount to evaporate in the event of a foreclosure. The lender should always have a real estate investor willing to put money down on a property. This shows a lender the borrower is serious about their plans, they believe in their project, and they believe in their team helping them complete their plan and accomplish their investment strategy for the project. No “skin in the game” equals a higher risk to the lender and a lower risk to the borrower. This term will become part of an experienced real estate investors vernacular in short order.
Tyler Weinrich, Owner, W Properties
After repair value (ARV) is the value a home is worth after you make repairs or improvements to it. This is important whether you are buying a rental property or flipping a house. It is essential to know what the ARV or top value of a house is to calculate what you can pay for it. Determining the ARV is not an exact science and more of an art. Some properties might have multiple target ARVs. For example, if you plan to buy the home, do minimal work to it, and keep it as a rental, it won’t reach the top property values in the area. However, if you plan to invest more money into the home and make it nice, the target ARV is the top in the neighborhood.
Ian Colville, Managing Partner, CCM-Finance, Inc.
Loan-to-value (LTV) ratio is a very common term and an important one if you are seeking financing from conventional lenders. Banks and other mortgage lenders use LTV ratio to assess risk. The higher the LTV, the more risk to the lender and the higher interest rate they will charge. The LTV ratio is determined by dividing the loan amount by the value of the property. Conventional lenders use the appraised value at the time of the loan to make this calculation. It is important to understand which ratios and which value of the property are being used in any computations. For example, private money lenders or hard money lenders tend to use a different value when assessing risk and determining the amount to loan.
9. Short Sale
Tony Sargent, Broker, Compass
A short sale is when a property is sold for less than the amount owed on a mortgage. This is an alternative to foreclosure and usually, the lender agrees on a short sale because they want to recover a portion of the loan owed to them. Because a short sale transaction is approved by the bank and not the homeowner selling the property, buyers of a short sale should expect to deal with multiple departments at the bank and for the deal to take longer to close than usual.
10. Earnest Money
Chris Waits, Acquisition Manager, We Buy Ft Worth
Earnest money is a deposit made to a seller indicating the buyer’s good faith in an arrangement. The earnest money is the remedy to a contract that expires, or a buyer doesn’t fulfill their obligations to the contract so the buyer will relinquish their earnest money to the seller if the buyer fails to perform in closing the deal.
11. Due Diligence Period
Michael Blank, Real Estate Investor & Author of ‘Financial Freedom with Real Estate Investing,’ TheMichaelBlank.com
It’s important to define the due diligence period properly. When buying a property, many investors make the mistake of defining their due diligence period in terms of number of days from signing the contract. Instead, define due diligence as “30 days after receipt of all documentation.” If the seller takes two weeks to deliver everything, you still have the full 30 days after that to complete your due diligence.
12. Net Yield
Andreas Johansson, Real Estate Developer & CEO, Berkovitz Development Group
The net yield is the rate of return on investment after deducting all expenses. This is calculated by deducting the expenses involved in owning the property, such as annual taxes, insurance, management costs, and also maintenance and vacancy costs, from the gross annual income.
13. Physical vs Economic Occupancy
Dan Tenenbaum, Founding Principal, Pacific Crest Realty
Physical occupancy is the proportion of real estate units that are physically occupied by tenants. Economic occupancy is the proportion of the gross potential rent, such as the total collectible rent assuming the units are fully occupied, and all tenants pay 100% of what is owed that is collected from tenants. Economic occupancy is often less than physical occupancy due to the rent concessions used at the time the lease is signed to entice a tenant to move in that is below the projected rent for that unit and the uncollected rents due to tenant underpayments or evictions. This is because, while there may be a tenant who is physically occupying the unit, the expected collected rent is lower than the projected rent. When budgeting, it is best to use economic occupancy rather than physical occupancy as it best projects the actual cash flow for the real estate project.
John Myers, Real Estate Agent, Myers & Myers Real Estate
Capitalization rate (cap rate) is an important calculation for investors to compare on investment to another. Capitalization rate is calculated by dividing your annual net operating income by the purchase price. The purchase price includes closing costs and repairs made after the purchase and paid for by the owner. A higher cap rate indicates a better investment opportunity.
15. Cash Flow Before Tax
Eric Sztanyo, Real Estate Agent & Founder, We Buy NKY Houses
Cash flow before tax is simply defined as your net operating income minus your expenses ― debt service and capital expenditures ― but it’s also before income tax. As an investor, it is critical to keep an eye on this number because as long as it is positive, everything else can build from there. A simple game to help investors learn this concept is Robert Kiyosaki’s Cashflow Game, which is a great tool to help investors learn how to get out of the rat race.
16. Wholesale Properties
Shawn Breyer, Owner, Breyer Home Buyers
These are discounted, distressed properties that are generally found through means other than real estate agents and the MLS. These properties can be found through online marketing, direct mail, cold calling, or door knocking. Homeowners who possess these properties usually are in a distressed situation such as tax delinquency, code violations, probate, foreclosure, divorce, or relocation and they need to sell their house fast, requiring someone to pay cash for their house to avoid delays associated with acquiring a loan from a bank.
17. Capital Expenditures
Sarah Larbi, Professional Real Estate Investor, SarahLarbi.com
Capital expenditures (capex) refers to items that have a certain life span and are higher cost items to replace but will need to be replaced at some point. They help extend the life of the property and are necessary to do to upkeep the property. These items can include the roof, windows, and furnace. Capex items shouldn’t come as a surprise and should be included in your cash flow calculations to save for these large items.
Paul Lisanti, Real Estate Agent, Keller Williams Signature Realty
This is a combination of “satisfy” and “suffice.” This happens when you need to choose an acceptable option instead of waiting for an optimal one. When comparing investment options, it’s easy to think that there is a better opportunity to come along. While that may be the case, it is often better for investors to determine what a successful investment looks like and move forward with the first one that matches or exceeds that criteria.
19. Letter of Intent
Monica S. Betancourt, President, The Monica Betancourt Group
The letter of intent (LOI) is used as a negotiation tool so that the parties do not have to write up the entire long contract before they have come to an agreement on terms. The LOI is an agreement to agree. It is a common practice in commercial or investment real estate to present an LOI to determine what each party agrees to do or not do in the transaction. Once negotiations are over, the contract is written with the agreed-upon terms and both parties can sign. The LOI is not considered binding. Only the signed contract is binding upon the parties.
Heather Carbone, Real Estate Agent & Investor, Heater Carbone Real Estate Team
The hard money loan is often most real estate investors’ favorite kind of financing. Hard money loans are typically expensive to obtain but also very quick to fund which can be very beneficial when trying to win a deal. A hard money loan is asset-based loan financing, through which a borrower receives funds secured by a real property. Hard money loans are typically issued by private investors or companies with interest rates that are typically higher than conventional commercial or residential property loan.
21. Broker Price Opinion
Tom Lehner, Marketing Coordinator, Coldwell Banker SSK
The broker price opinion (BPO) refers to the estimated value of a property by a real estate broker. While appraisals are done by a third party for a complete and fair estimate, often a BPO will be done by a broker as a quicker alternative. A drive-by BPO is done when access to the interior of a property is not available. Keep in mind though that each state has different regulations on BPOs.
22. General Contractor & Subcontractors
Carter Fisk, Owner, Carter Buys Homes
The general contractor (GC) is the person who organizes all the different components of a renovation from getting permits and plans to scheduling to buying materials to paying all the workers. Many real estate investors will GC their own projects as it can save a lot of money to do this. In some states, you need to be licensed as a GC but, in many, you do not. Subcontractors, on the other hand, are hired by the GC to do specific jobs. These are usually specific trades like plumbing, electric, HVAC [heating, ventilation, and air conditioning], foundation, and so on. Most subcontractors in these trades need to be licensed and insured. Many times, a GC will simply set up a job then “sub it out.” This means they will hire the subcontractors directly and pay them out of their own pocket. For an investor, using subcontractors is usually much cheaper but requires much more time and oversight.
Khari Parker, Real Estate Investor & Instructor, Lost Curriculum Consulting Services
Staging is a type of marketing strategy where investors take specific actions to improve the aesthetics of the property. The intention of staging is to provide prospective homebuyers a perspective of how the property would look and feel if it were lived in, increasing the property’s appeal in the eyes of the buyers. Think of staging as turning a house into a home.
John Boyd, Principal, Boyd Company
Repurposing is the use of something for a purpose other than its original intended use. Repurposing projects represent some of the biggest money-making opportunities for real estate investors today. Millions of square feet of valuable retail space are sitting vacant today because of the rapid growth of ecommerce. Investors are increasingly looking at vacant retail, including vacant grocery stores for new uses ― like office space, housing, recreation, and other mixed-use developments. A great example is the massive former Sears store in King of Prussia Mall in suburban Philadelphia being repurposed into mixed residential and commercial development.
25. Fair Housing Act
Melissa McKinney-Breyer, Owner, The Hive Law
The Fair Housing Act is a law that prohibits discrimination from real estate agents, landlords, sellers, or any other person or company that may have an influence in the decision-making process in the buying, selling, renting or financing of housing. This includes discrimination against people based on race, color, sexual orientation, nationality, religion, disability, and family or any other characteristics from a protected class. This law prevents people from using any portion of an individual’s protected class to deny them the ability to obtain housing.
The Bottom Line
The real estate industry has its own language that every investor should know. A real estate investor needs to be familiar with the different real estate investing terms and acronyms to be able to communicate effectively and be successful. If you’re new to real estate, make sure to check the above list of real estate terms to help you better understand real estate lingo.