Real Estate Investing


Terminology and Lingo

Like most industries, Real Estate has it’s share of terminology, acronyms and lingo that are specific to the discipline. It’s critical to both learn and fully understand these terms to be a proficient real estate investor.

The amount of lingo can seem overwhelming at first, but as you read, educate yourself and then get involved with the processes, most of these terms will quickly become second nature to you.

If you have been a homeowner in the past, some of the terms will be familiar, though you may see and hear words that you thought you understand used in a new context and as an investor you’ll think about them differently. Don’t think you need to memorize all these up front though, just use this as a reference or guide when something new comes up that you aren’t familiar with.

Accelerated Depreciation: ACRS (Accelerated Cost Recovery System) is an accounting calculation that accelerates depreciation of an asset in the first few years of ownership. Tax rules have evolved and now MACRS (Modified) is the method used sometimes for depreciating assets for tax benefit purposes.

Acceleration Clause: A clause often included in contracts that gives a lender the right to demand immediate payment of the loan balance if the borrow defaults in any way.

Adjustment Date/Period: The date that an interest change with change, or the time periods that will trigger and adjustment to the rate on an Adjustable Rate Mortgage (ARM).

Agreement of Sale: A legal contract between buyer and seller that details the price and terms of a transaction.

Alienation Clause: A loan provision that requires borrow to pay off the remaining loan balance if the property is sold or ownership transferred.

AMR (Average Market Rent): The typical rental prices for a property in the respective area.

Amortization: The process of paying a loans interest and principal through scheduled payments. An amortization table is used to calculate what those monthly payments will be based on the amortization term (length of loan).

Appraisal: A formal assessment of value of a property by a third-party professional.

Appraiser: A professional qualified to estimate the value of property. Requires education, training and experience to achieved certification.

Appreciation: The increase in value of an asset above the initial purchase price. Appreciation may result from improvements to the property (i.e., rehab, renovation, addition or repurposing) or through passive appreciation based on general market value increases.

APR (Annual Percentage Rate): The interest rate stating the cost of borrowing money of one year period.

ARM (Adjustable-Rate Mortgage): A loan with an interest rate that periodically adjusts based on a set of rules or a rate index referenced in the loan agreement. ARMs often have a cap included to limit how much a monthly payment or rate is allowed to increase.

Arbitrage: A process of taking advantage of imbalances between different markets and their prices.

Arrears: Payments that are owed and past due.

ARV (After Repair Value): The market value of a property after all repairs and renovations are complete.

As-Is Condition: phrase included in contracts indicating a tenant or buyer understands and accepts that a property may have defects.

Assessor: a public official who estimate value of property for tax purposes (not the same as an appraiser or appraisal for market value).

Assignment: The transfer of rights and responsibilities from one party to another for an obligation. The assignee is the person or entity that receives the rights, the assignor is the person or entity that is transferring the rights or interests away.

Balloon Loan/Payment: A loan structured to have a full payoff of the loan at a specific date/term. A Balloon Loan with a have an amortization schedule longer than the Balloon Payment due date.

Bankruptcy: A legal proceeding where the debtor obtains relief from financial obligation through a restructuring of their finances. Common types are Chapter 7 Bankruptcy (liquidation of business) and Chapter 11 Bankruptcy (reorganization of business).

Book Value: Value of a property based on the purchase amount, plus upgrades and improvements minus depreciation.

Bridge Loan: A short term loan until long term financing can be obtained.

Brokerage: The process of bringing two or more parties together in exchange for fees, commissions, or some other type of compensation. A broker is licensed to own and operate a brokerage and often has agents working within the brokerage under the supervision of the broker.

Building Code: Legal requirements set by local governments regarding use of a property and allowable design, materials, and methods used in the construction or modification of a property.

Buy and Hold: A strategy to purchase a property with the intention to hold it while earning income through rents for an extended period of time.

Buyer’s Agent: A real estate agent who represents the buyer in a real estate transaction.

Buyer’s Market: A real estate market condition where there are more sellers than buyers in the active market. This typically leads to stagnation or decline in housing values and homes tend stay on the market longer before they are sold. This provides buyers more choice, ability to negotiate lower prices and fewer competing bids.

Call Date/Call Option: a provision and right that may be included in a loan that gives the lender the right to call for payment of total remaining balance.

Capital Expense/Improvements: An expense incurred that provides long term value or improvement to a property above it’s original condition. Capital expenses are typically treated differently for tax and depreciation purposes (consultant your accountant).

Capital Gains: Amount of profit from the net proceeds of the sale of a capital asset.

Capital Markets: A term referencing the public and private marketplace where individuals or business can either raise or borrow capital.

CAP (Capitalization) Rate: A financial ratio calculated by dividing the Net Operating Income (see NOI) by the property value. In it’s simplest form a higher cap rate usually indicates a better cash flowing opportunity, but it is important to consider many other factors and cap rates can vary widely from market to market.

Capital Reserves: Funds that are set aside in anticipation of future unexpected/needed capital improvements or repairs. A capital reserve is typically setup at the time of acquiring a property and is funded monthly by setting aside a portion of monthly income.

Carryback Financing: A form of seller financing where the seller agrees to hold a note/loan for portion of the sale price of a property.

Carrying Costs/Charges: The costs that a landlord/owner most continue to pay while a property is vacant or unsold.

Cash Flow: The amount of money left over each month (or year) after expenses, debt servicing and vacancies.

Cash on Cash (COC) Returns: A ratio, expressed as a percentage, of cash flow or income received in a year relative to the total cash invested.

Cash Out Refinance: The act of refinancing a mortgage for an amount higher than what is owed with the current mortgage. The owner receives surplus cash/funds for the difference.

Certificate of Eligibility-Veterans Affairs: A document issued by the Department of Veterans Affairs verifying the eligibility of a veteran to obtain a VA loan.

Class of Property: Informal classifications to describe the quality and location of a property. Can vary by location, but generally: Class A – properties that will generate the highest rents and values. Class B – properties that most tenants and buyers find desirable but may not have all the luxuries, accessories, or location desirability of a Class A property. Class C – properties that are acceptable but lacking in most amenities, build quality and may be in much less desirable locations – often described as cost effective/affordable. Class D (often referred to as “War Zone”) – least desirable locations, qualities and amenities, often considered potentially dangerous areas.

Clear Title: A property title that shows that it is free of liens, defects and any other legal encumbrance.

Closing: The final process and act of completing title transfer, loan procurement all monies exchange hands between buyer and seller.

Closing Costs: Costs associated with the sale of a property in addition to the purchase price. Examples are legal fees, transfer fees, etc. that are due at closing.

Closing Date: The date a real estate transaction is finalized and completed including all legal, financial and deed transfers.

Closing Statement/Settlement Statement: The document that itemizes all costs, fees and transfers of funds at closing.

Clouded Title: Conditions or situations that are uncovered during a title search that present a negative impact on “clear” title.

Co-Borrower: Individual who is jointly responsible for a loan and who may also have title to the property along with the Primary Borrower.

Collateral: Another property or asset offered by a borrow to a lender to secure a loan against default.

Collections: An effort by a lender to collect from a defaulting borrower, which will include recording of documents and potential lead to foreclosure.

Commercial Property: Properties that are used for business purposes. Includes large-multifamily (5 or more units at a single property) real estate. Borrowing for these properties will require commercial loans working with lenders and brokers that operate in the commercial space.

Commission: Compensation for a salesperson paid out of the transaction.

Comparables/Comps: The process of determining an estimate of value of a property based on recent sales of similar properties in the same area.

Compound Interest: Interest calculated on initial principal and accumulated interest over a period of time.

Conditional/Contingent Offer: A purchase offer subject to specific conditions. Those conditions can vary widely (financing, repairs, etc.). A conditional/contingent offer typically has a time component after which the contingencies are removed. The buyer has the option to back out of an accepted offer if the conditions are not met within the specified time.

Condominium: Properties that have shared ownership, owners have title to individual units and a portion of the common areas and elements of the property.

Conforming Loan: A mortgage that meets conditions required by Fannie Mae and/or Freddie Mac. They are eligible for lower interest rates

Debt Service: The amount of money required to cover interest and principal payments on a loan for a specific time period.

Debt to Income Ratio: The percentage of borrower’s monthly debts divided by monthly gross income.

Deed: The legal document that is registered as evidence of the ownership of a property, signed by both the seller and buyer.

Deed in Lieu of Foreclosure: A situation where the borrower hands over the deed to a property to satisfy mortgage debt to avoid foreclosure.

Default: When a borrower fails to meet the terms of a mortgage loan agreement. When a borrower is in default, for failing to make mortgage payments the mortgage holder can take legal action to foreclose on a borrower in default.

Deferred Maintenance Account/Reserves: Setting aside money to fund and provide for maintenance expenses.

Delinquency: When a borrower fails to make timely mortgage payments, which may eventually result in foreclosure.

Depreciation: A decline in the value of a property’s improvements (structures, etc.) that is often tax deductible.

Disclosure: Written statement that the seller presents to a potential buyer regarding information relevant to a property.

Discount Points: Fees charged by a lender to provide a lower interest rate. One point equals 1%.

Document Preparation Fee: Fees charged by a lender, broker, title/settlement companies to pay for costs associated with documentation and paperwork.

DOM (Days on Market): The number of days that a property has been listed for sale.

Down Payment: The different paid between the purchase price and the amount financed on a loan.

DSCR Loan (Debt Service Coverage Ratio Loan): A mortgage loan that is given based upon a property’s ability to cover loan costs through rental income rather than the borrower’s personal income.

Due Diligence: The process a buyer goes through to investigate and review whether a property is a satisfactory purchase. In a purchase offer a buyer may place a continency on the offer that they have a specified number of days to perform due diligence before finalizing the purchase or back out of the offer.

Due on Sale Clause: Standard language in a mortgage that provides the requirement for a loan to be repaid if a property is sold.

Earnest Money: Funds provided by a buyer when making a purchase offer to show serious intent to make the purchase.

Easement: Rights given to a non-owner to use a part of the property for a specific purpose. For example, utility service access is a common easement.

Eminent Domain: The power of government entities to pay fair market value for a property and then appropriate it for public use.

Encroachment: Any improvements made that illegally intrude on the property of another party.

Encumbrance: Any right or interest that prevents with the use of a property or prevents a transfer of ownership of a property.

Entitlements: In land development, the legal process for gaining approvals for development plans. It determines what can, and what can’t be done with a property.

Equity: The net amount of value an owner holds in an asset after subtracting outstanding loan amounts against the property. As loans are paid down, equity increases.

Errors and Omissions Insurance: An insurance policy that insures against mistakes of of a professional, such as an architect, builder or contractor.

Escalation Clause: A clause in a lease that provides for the increase of rents when a landlord/owners expenses increase.

Escrow Account: An account established by a mortgage lender or servicing company for holding funds for the future payment of specific items, most commonly for things like insurance and property taxes.

Escrow Closing: The process and event where all final conditions and transactions occur to transfer a property from seller to buyer.

Escrow Service: Escrow services are provided by a neutral 3rd party that holds funds and ensures proper execution of all documentation required as part of purchase contracts before funds change hands between the different parties in a real estate transaction. Title Service companies often also provided escrow services.

Escrow Analysis: Investigation (typically by mortgage lender) of whether amounts collected are appropriate relative to estimated expenditures.

Estoppel Certificate: A signed document and statement certifying that statements made are factually correct as of the date of the statement and can be relied upon by 3rd parties.

Exclusive Agency Listing: A written agreement between a real estate broker and seller where the seller promises to pay a broker commission if a property is leased or sold during the listing period.

Exit Strategy: A planned strategy for an investor for the eventual liquidation of an investment deal.

Fair Housing Act: Federal legislation that prohibits the refusal to sell or rent based upon race, color, religion, family status, sex or disability.

Fair Market Value: The highest price at which a buyer would be willing to purchase, and the lowest at which a seller would be willing to sell.

FannieMae: A leading provider of mortgage financing that purchases mortgages from other lenders – with a mission to ensure an affordable, inclusive and accessible housing market.

Federal Housing Administration (FHA): Part of the Department of Housing and Urban Development provides mortgage insurance on loans made by FHA approved lenders.

Federal Housing Administration Loans (FHA Loans): Mortgages insured by the Federal Housing Administration. FHA Mortgage Insurance is a type of insurance that requires a feed a closing to insure the loan with the FHA.

Fee Simple: The highest level of ownership interest a person can have in a piece of real estate, complete and total ownership. A fee simple owner may do as they wish with a property as long as it falls within easement and zoning laws.

Fiduciary: An individual with authority over the management of an asset, plan or it’s disposition that renders, is paid for providing those services, and has a responsibility to act in the interests of the plan, owners or investors over their own.

First Mortgage: The main mortgage on a property. Also often referred to as First Position, or simply a “First”.

First Right of Refusal: a clause that gives a tenant or the first opportunity to buy a property, lease additional space, etc. at the same price or terms as those in an offer from a third party that the owner is willing to accept.

Fixed Costs: Expenses that remain the same regardless of of level of sales, production, or other variable factors.

Fixed Rate Mortgage: A mortgage loan that has a fixed interest rate throughout the term of the loan.

Fixtures: Items and improvements that are considered part of the property when they are permanently attached.

Flood Certification: The process to analyze whether a property is located in a flood zone.

Flood Insurance: An insurance policy that is required to prevent against loss for properties that are within a designated flood zone.

Foreclosure: a legal process where a lender recovers the balance of loan when the borrow does not make payments, defaulting on the loan agreement.

For Sale By Owner (FSBO): A method by sellers to market and sell their property without the services of a real estate broker and agent. The seller works directly with buyer and/or buyers agent.

Freddie Mac: Chartered by Congress in 1970, Freddie Mac operates in the secondary market rather than directly with home buyers, buying mortgages and then pooling them into securities.

General Contractor: The person or business that contracts for and oversees a construction process or build.

General Partner (GP): The member in a partnership that has authority to bind the partnership, and who acts in an active decision making role on behalf of limited partners (LP). The GP shares in profits and losses but is typically compensated in a different structure than LPs.

Good Faith Estimate: A lender or broker estimate that shows all costs associated with obtaining loan including loan processing, title and inspection fees.

Government Loan: A term used generally to refer to loans that are insured or guaranteed by the FHA, VA or Rural Housing Service.

Grace Period: A period of time in which a borrower may make loan payment after the due date without penalty.

Graduated Lease: A lease that is structure in such a way that rent payment may vary in accordance with future defined contingencies.

Grant: To give or transfer an interest in a property by deed or other legally documented method.

Grantee: The party that receives an interest from a Grant.

Grantor: The party who transfers interest in the Grant to the Grantee:

GOE (Gross Operating Expense): The total of all expenses incurred to operate a property. This is exclusive of debt/loan payments.

GOI (Gross Operating Income): The total expected income (Gross Scheduled Income) from operating a property, with vacancies factored in.

GRM (Gross Rent Multiplier): The ratio of the price of a property/investment to the annual rent income before expenses. A simple calculation to quickly gauge the general potential for profitability with an investment.

GSI (Gross Scheduled Income). The total expected income that would be collected based on rental agreement.

Guaranty: An agreement in which the guarantor promises to satisfy debts regardless of any obligations of others, if the other debtor(s) fail to do so.

HELOC (Home Equity Line of Credit): A loan that uses the owners’ equity value in a property as collateral for the loan.

Holdback: Money that is withheld by the lender until certain conditions are meant. Often used for construction projects/loans where funds are not fully released until the work is verified complete.

Holding Period: The period of time that an investor will have ownership of an investment between purchase and sale. Often used in reference to Holding Costs which are the costs associated with holding the property until it is sold.

Home Equity Line of Credit (HELOC): An open ended credit line that allows a homeowner to borrow up to a pre-determined amount against the equity in their home.

Home Equity Loan: A type of loan that allows owners to borrow against equity in their home.

Home Inspection/Inspector: An examination of the condition of a property prior to purchase. An inspector is a certified professional that performs the examination and provides a report of findings to the prospective buyer.

Home Owners Association (HOA): A group that provides oversight and governance for a community, neighborhood and is responsible for enforcing the various covenants, and restrictions for properties and their use by property owners. The HOA is funded by homeowners and funding often will include coverage for common area maintenance and amenities, and other costs of managing the HOA.

Homestead: The property used by an owner as their primary residence.

HVAC: A general reference to heating, ventilation and air conditioning mechanical systems.

Impounds: A reference to the portion of a monthly mortgage payment reserved in the account for paying insurance, property taxes and private mortgage costs (see also Escrow).

Improvements: Upgrades or changes made to a property to improve its value and use.

Income Property: A property, not occupied by the owner, that is used to generate income for the owner,

Indexed Rate: An interest rate charge that is based upon a standard interest rate index with a profit margin added.

Inflation Rate: The rate at which consumer prices increase year over year.

Initial interest Rate: The original rate of interest charged on an adjustable rate loan is initiated prior to any adjustments. An adjustable loan may also have an interest rate cap limiting how much the rate can vary from the initial rate. Likewise, an initial interest rate duration may designate the length of time the initial rate will be in effect.

Insurance Binder: A temporary insurance policy in place until a permanent policy is drawn up and finalized.

Interest: The cost charged for borrowing money over a period of time. Most commonly charged to the borrower via monthly payments. Depending on terms a lender is willing to set, alternatively a loan can be structured with interest paid up front, or at the end of the loan.

Interest Only Loan: A mortgage that a borrow pays only interest, and no principal until due at which time the principal balance all becomes due.

Interest Rate: The percentage fee charged, usually referenced on an annual basis, to borrow money on a loan.

Interest Rate Cap/Floor: The maximum (Cap) and minimum (Floor) rate that may be charged on an adjustable rate mortgage.

IRR (Internal Rate of Return): A measure used by investors that estimates the rate of return inclusive of projected cash flows and taking into account the time value of money (see NPV).

Joint Liability: A situation where responsibility rests with two or more people to fulfill the terms of a loan or debt.

Joint Tenancy: An ownership structure where two or more people have equal shares in a piece of property and rights pass to surviving owners in the event of death.

Joint Venture: A business arrangement or structure where two or more parties agree to participate in an activity together.

Jumbo Loan: A mortgage whose value exceeds the required limits of Fannie Mae and Freddie Mac.

Lease: The contract between a property owner and a tenant specifying costs, terms and conditions and time period that the tenant may occupy the property while adhering to those terms and conditions.

Lease to Own/Rent to Own: A method to acquire a property by entering into a lease agreement and also an Option to Purchase agreement the gives the tenant the right to purchase the property by a predefined date for a predetermined purchase price.

Legal Description: The description and location of a property that is recognized by the laws and jurisdiction.

Lender Fees: Fees charged by the lender to obtain a loan. These fees vary by lender and cover lender costs to establish the loan, underwriting fees, etc.

Letter of Credit: Promise from a bank or lending party that the issuer will honor request of payment as defined by conditions in the letter of credit.

Letter of Intent: An initial proposal and/or agreement of terms as a basis for a contract.

Leverage: A method to increase the rate of return of an investment by borrowing from others to earn a greater return than the cost of funds borrowed.

Lien: A legal claim made against a property (or asset) to ensure payment of a debt. If the lien is not paid (satisfied) the liens are recorded with a government entity and the lien holder has the right to take ownership of the asset used as collateral for the debt.

Lien Waiver: A waiver of right of lien often used before a general contractor can receive money.

Line of Credit: An agreement with a lender for standing amount of credit that allows the borrower access to funds of a pre-set amount, with agreed to terms. The borrow is able to pay off debt and take out funds out again as needed in accordance to the agreed terms.

Liquid Asset: An asset that can be quickly and easily converted to cash.

Liquidity: The ability and ease of which an individual or business can convert assets to similar value in cash.

Listing: An agreement that is entered into by a seller with a real estate broker to market a property for sale.

Listing Agent: The realtor that has has entered into an agreement with a seller to list a property for sale, giving them rights to market and sell the property on their behalf.

LTV (Loan to Value): The ratio of the amount of a mortgage loan to the total value of the property. Loans are typically structured based on a maximum allowable LTV that a lender is willing to agree to.

Lock-In: A lender commitment to a specific interest rate that is time bound. (Lock In Period)

LTR (Long Term Rental): Traditional rental property usually with initial lease periods of 6 months or longer. Typically unfurnished and tenant pays some of all utilities.

Long Term Lease: A lease agreement that will typically last at last 3 years from initiation to expiration or renewal date.

Maintenance Fee: The monthly charge to homeowners association members to pay for the repair and maintenance of common areas and amenities.

Margin: A percentage added to index for the mortgage term on an index based adjustable rate mortgage.

Market Rental Rates: A rental rate that landlord/owner could charge to be competitive for similar properties in the same market area.

Market Value: The price a property would sell for at a point of time in a competitive market (See Comping)

Master Lease: A primary lease controlling subsequent property leases and may be inclusive of more than the sum of those subsequent leases.

Maturity Date: The last date of a term of for a mortgage loan (or other financial instrument).

Maximum Allowable Offer (MAO): An investors calculation of the maximum amount they are willing to pay/offer for a specific investment based on their analysis of a deal.

Mechanic’s Lien: A claim on a property to secure payment for value of work and materials associated with construction, repairs and improvements until payments have been satisfied.

Mixed Use Property: A property that includes multiple types of uses such as residential, commercial, retail, etc.

Mortgage Banker: A financial institution providing home and property loans. These mortgages are often subsequently sold to investors.

Mortgage Broker: Individual that matches and brokers relationships between prospective borrows and lenders.

Mortgagee: The lender who provides the mortgage loan.

Mortgage Insurance: An insurance instrument that might be paid for by the buyer to insure a lender against mortgage loan default by the buyer. This is a common requirement for loans with a high LTV.

Mortgage Interest Deduction: Tax write off that the IRS may allow for homeowners to deduct interest payments on mortgage loans.

Mortgagor: The borrower on a mortgage loan.

Mortgage Term: The length of time the mortgagor pays the specified rate on a mortgage loan. The term may be different than the amortization period. Terms may be shorter than the amortization which results in a remaining loan balance that must be paid or refinanced at the end of term.

MLS (Multiple Listing Service): A service used by realtors to provide information on listed homes for sale.

MTR (Medium Term Rental): Rental property that is typically rented for at least one month at a time and includes furnishings and utilities as part of the rent. Also may be referred to as executive, corporate housing. Traveling nurses are frequent tenants for MTRs.

NOI (Net Operating Income): Gross Operating Income (GOS) minus Gross Operating Expenses (GOE).

NPV (Net Present Value): A measure of current value of a future stream of cash flow or payments from an investment accounting for a discount (interest) rate.

Net Purchase Price: The gross purchase price less associated financed debt.

Net Returns: The returns paid to investors, )often in partnerships, funds or syndications) after fees to advisers, managers, etc.

Net Sale Proceeds: The remaining funds from the sale of an asset minus commissions, closing costs, and other expenses.

Net Worth: The financial sum of an individuals assets calculated as Assets minus Liabilities.

No-Cost Loan: A loan that has no fees or costs from the lender, which is offset by a higher interest rate.

Non-Conforming Loan: Any loan too large or not meeting qualifications to be eligible for purchase by Fannie Mae or Freddie Mac.

Non-Discretionary Funds: Funds that an investment manager must have approval from the investor(s) for the transaction.

Non-Performing Loan: A loan agreement that the borrow cannot meet contractual principal and interest payments.

Non-Recourse Debt: Loans limiting the lender’s option and ability to collect on the value if a borrower defaults.

Note: Legal document that requires a borrower to repay a mortgage based on a set of terms (interest rate and time).

Notice of Default: Written notification from a lender to a borrower in default of the agreement that legal action may be taken.

Open-End Fund: A investment fund with no specific end, and accepting new investor capital and actively making new investments.

Operating Expense: The costs associated with operating and managing a property separate from capital expenditures and improvements.

Option: The purchaser of an option contract obtains the right, but not the obligation to execute a contract at a specified price, for a specified period of time in exchange for the price of the option. The seller of the option contract is obligated to perform per the contract should the purchaser choose to exercise the option.

Origination Fee: A fee charged by lenders to cover their costs associated with arranging a loan.

Originator: A company that underwrites loans.

Owner Financing: A financial transaction approach where the seller agrees to finance all or a portion of the purchase price (also referred to as seller financing).

Percentage Rent: A commercial leasing approach where the rent amount is adjusted based on a percentage of gross sales or revenues the tenant receives in their business operation.

Personal Property: An items that belong to a person, and not part of a real estate property.

PUD (Planned Unit Development): An ownership type where individuals own the building or their unit but jointly own common areas with other members of the development/association.

Points: Fees paid to a lender typically to lower an interest rate, 1 point is equal to 1% of the loan amount.

Portfolio: An aggregate term referring to the various assets owned by an investor.

Power of Attorney: A legal document that allows one person to legal act on the behalf of another.

Power of Sale: A mortgage or deed of trust clause that provides the mortgagee or trustee the right and power to advertise and sell the property at auction if the borrow is in default.

Principal: The initial amount of funds borrowed as part of a loan.

PITI (Principal, Interest, Taxes and Insurance): All elements include in a monthly monthly payment to a mortgage landlord that requires impounding and escrow management of taxes and insurance.

Private Money Lending/Lender: Both a financing strategy for active real estate investors and a passive investment strategy for private investors where the private investors fund loans for active investors.

Private Equity: An investing strategy to fund real estate investments through pooled funds of many investors, with a small group of management or general partners actively managing the investments on behalf of passive investors.

Pre-Approval: A process that lender performs to analyze a prospective borrower’s ability to pay for a home and the resulting confirmation of the proposed amount to be borrowed provided as a Pre-Approval Letter.

Prepaid Expenses/Fees: Expenses that are paid in advance typically at closing. Examples include taxes, insurance, interest, and assessments.

Prepayment Penalty: A penalty charged, for loans that have a prepayment penalty clause, to a borrower when a loan is paid off prior to maturity.

Prime Rate: Consider the best interest rates for preferred customers of a bank.

Principal: The money originally borrowed in a mortgage or loan, before interest is included. As a loan is paid off the remaining balance to satisfy the loan is referred to as the principal balance.

Real Estate Owned (REO): Refers to properties that are owned by financial institutions as a result of a foreclosure on a loan.

Realtor: A professional that is a member of an organization of people engaged in the business of buying and selling real estate.

Refinance: To arrange for new financing or loan that pays off the original loan.

Rental Arbitrage: Leasing a property from an owner and then sub-leasing that at a higher price to another tenant. Has become a popular strategy for STRs without having to own the property.

ROI (Return on Investment): A measure, expressed as a percentage of the value returned/earned based on the price of an investment.

Retirement Plans: Programs designated and structured for the purpose of funding retirement. Often government sponsored with tax benefits. Programs such as 401(k), 403(b) refer to sections of the tax code and are sponsored through employers. Individual Retirement Accounts (IRA) can come in many forms such as Roth IRAs, Self-Directed IRAs, Simplified Employee Pension IRAs. Some of these programs may be eligible to use for real estate investment purposes, but working with a qualified accountant or tax professional is important to ensure they are used correctly.

Private Debt: Mortgages or loans for which an individual is responsible.

Private Equity: A real estate investment made by non-commercial entities.

Private Mortgage Insurance (PMI): An insurance policy that a lender will require when a borrower’s down payment or amount of equity is less than 20% of the value of the property.

Private Placement: Sale of securities in such a way that it is exempt from registration rules and requirements of the Securities Exchange Commission (SEC).

Promissory Note: Written agreement to repay a specific amount over a specific period of time.

Property Tax: Taxes levied on the ownership of private property.

Public Auction: Announced public meetings at specified location and time for the purpose of selling a property to repay a mortgage that is in default.

Purchase Agreement: Written contract between a buyer and seller defining terms and conditions for the sale of a property.

Qualified Plan: An employee benefit plan approved by the Internal Revenue Service as a tax exempt plan.

Quitclaim Deed: A document that releases a party from interest they have in a property.

Rating Agencies: Firms providing services that rate on a numeric and qualitative level the credit worthiness of securities.

Raw Land: Property that not been developed in any way or form.

Real Property: Land, and any improvements affixed to that land of a permanent nature.

Realtor: A real estate broker or agent who is an active member of or a local real estate board affiliated with the National Association of Realtors.

Recording: Documentation at a registrar’s office in the local jurisdiction that keeps properly executed documents.

Recording Fee: Fees charged by realtors to including the sale into the public record.

Recourse: An option or ability for a lender for recovering losses for debt in default from personal assets of a secondary party.

Rehab: Short form of rehabilitation, that in real estate refers to extensive renovation to extend the useful life of a property.

Real Estate Investment Trust (REIT): A trust that combines investment capital from pools of investors for the purpose of making real estate investments.

Renewal Option: A clause in a lease agreement allowing a tenant to extend the terms of a lease.

Renewal Probability: A metric used by landlords and property owners to evaluate the likelihood of a tenant renewal lease at market rates upon lease expiration.

Rent: The feed paid for the occupancy and/or use of rental property and/or equipment.

Rent Growth Rate: Project trends for rental rates over a period of time.

Real Estate Owned (REO): Real estate properties that are owned by a lending institution as a result of foreclosures and borrower default.

Replacement Cost: Estimated of cost based on current market construction costs to replace building improvements for an insured property or a property being appraised.

Rescission: Legally withdrawing a contract or consent.

Reserve Account: An account funded by a borrower to protect a lender. Also may refer to an investors account holding reserve funds for future expenses.

Return on Assets (ROA): A measure of net profits produced based upon the value of an asset.

Return on Equity (ROE): A measure of return on the amount of equity in a property or business.

Return on Investment (ROI): A measure of earnings or profit (or loss) from an investment expressed as a percentage.

Sale-Leaseback: An arrangement where a seller leases back the use of a property from the buyer after completion of the sale.

Sandwich Lease: An investment strategy of leasing a property from an owner and the subsequently leasing the property to another tenant.

Second Mortgage: A mortgage loan against an asset that already has an existing mortgage. The second mortgage is in “second position”. Other loans or financing can also be subsequently held, referred to as third position, fourth position, etc. These are not uncommon with investors how fund purchases and rehab work with private and hard money lenders.

Secondary Market: Reference to the buying and selling of mortgages and notes after completion of the initial mortgage/loan, typically in large pools of mortgages/loans.

Securities and Exchange Commission (SEC): A federal agency overseeing the issuance and exchange of public securities.

Seller Financing: A financing strategy where a seller takes payment terms rather than a cash payment for an asset purchase. In effect the seller is the lender. Also referred to as Seller Carry-Back.

Servicer: An organization/company that manages the process of collecting principal and interest payments from a borrow and mages the borrower escrow accounts on behalf of a trustee. Often referred to as “Servicing the Loan”.

Settlement: The process performed by escrow agent to carry out the contractual agreement between borrower and lender, and/or borrower and seller. A settlement statement is product that documents all elements of the transaction and various distribution of funds. Also referred to as Closing.

STR (Short Term Rental): Properties rented for very short periods such as nightly or weekly. Commonly referred to as Airbnb’s, VRBO’s, etc. referencing popular online services for marketing STRs.

Site Analysis: A step in the land development process that determines if a parcel of land is suitable for particular use.

Site Development: The improvements that are made to a site being developed before construction may begin.

Site Plan: A description and map of location of improvements to be made to a site that will be developed.

Special Assessments: Charges or taxes that are levied on real estate for public improvements specifically benefitting the property.

Step-Up Lease: A lease agreement specifying increases in rent at certain intervals throughout the term of the lease.

Subcontractor: A contractor hired by a general contractor typically to perform specialized tasks as part of a construction project.

Subdivision: A common type of housing development created by dividing a large tract of land into individual lots.

Subject-To: A financing strategy where a buyer takes over paying for the existing mortgage loan of a seller, keeping the financing in the original owners name until it is paid off. The buyer takes ownership of the property and holds the deed.

Sublessee: Someone holding rights of use and occupancy under a lease contract with the original lessee (a sublease). The original lessee retains primary obligation under the lease.

Subordinate Loan: Any mortgage or loan in place after the primary mortgage loan using the property for collateral. Often called a second mortgage/second position loan or even third mortgage/third position.

Surety: A person who willingly binds themselves to a debt or obligation of another party.

Survey: A professional documentation and record of the boundaries, measures structures on a property, which will also include any easements or encroachments on the property.

Sweat Equity: An informal term referring to the non-financial investments that an owner adds to increase the value of a property.

Syndication: A method to finance a real estate transaction that pools money from from several investors.

Tax Lien: A lien type placed on a property if an owner has not paid property of personal taxes.

Tax Roll: Records that contain descriptions of land parcels and their owners in a county.

Tenancy in Common: Ownership held by two or more owners with an undivided interest in a property and no right of survivorship.

Tenant: A party who rents/leases property from another with a lease agreement.

Timeshare: A form of ownership purchased that allows use for a specific period of time or percentage of interest, typically for a vacation property.

Title: Legal evidence of ownership of a property. Often also refers to as Abstract of Title.

Title Insurance: A form of insurance that protects lenders and properties against claims questioning legal ownership of a property.

Title Service: A company that provides services to validate title and who typically also arranges for title insurance and escrow services.

Title Search: A process for analyzing all transaction in the public record for a property to determine if there are any title defects with potential to interfere with a clear transfer of property ownership.

TDS (Total Debt Service) Ratio: Percentage of gross annual income that is needed to cover all a borrowers debt payments, used by lenders to determine a borrowers ability to repay a loan.

Townhouse: An attached home not considered to be a condominium ownership structure.

Transfer Tax: A tax levied by state or local authorities when ownership of a property changes hands.

Treasury Index: A measure often used to derive interest rate benchmarks for adjustable rate mortgages.

Triple Net Lease (NNN): A lease requiring the tenant to pay all property expenses in addition to rent payments.

Trustee: A fiduciary who oversees property, funds or accounts on behalf of another.

Truth-in-Lending: Federal legislation requiring lends to disclose all terms and conditions of a loan in writing.

Turnkey Property: Properties that are in move in condition, ready to sell to a buyer or rent to a tenant.

Under Contract: A period of time after a following the acceptance of a buyers offer and the buyer finalizes financing, and seller cannot accept a competing offer, except as a backup offer.

Underperforming Property: A property that is currently not providing the level of income it has the potential to earn. Typically due to rents below market rates, low vacancy, property condition, poor property management or some combination of any or all of these.

Underwriter/Underwriting: A company, firm or individuals in a financial institution who evaluates and assesses risk of an investment and credit worthiness of a borrower.

Unencumbered: Term referring to a property being free of liens or any other encumbrances.

Variance: Permission allowing a property owner to vary from a zoning ordinance due to special circumstances.

VA Loan: A mortgage obtained through a Veterans Affairs program that may require very low or no down payment from the borrower.

Vacancy Factor: A percentage assumed by an investor or property owner to project the income from rental property and potential periods of no rental income due to to tenant vacancy.

Variable Rate Mortgage: A loan product that the interest rate will vary and adjust based on current market interest rates.

Vested: Having right to draw or ownership of funds within a pension or retirement fund.

Wholesaling: An investing strategy where the “wholesaler” finds a property, places it under contract with the seller and also finds a buyer to assign the contractor to and earning an assignment fee that is paid by the end buyer for his efforts.

Working Drawings: Detailed blueprints for a construction plan or project that are included as contractual documents describing how a project will be built.

Wrap (or Wraparound) Mortgage: A form of seller financing where the seller keeps the original loan and provides a loan directly to the buyer that includes the amount of original loan plus any additional agreed to amount. The wrap loan is subordinate (second position) to the original loan. The buyer typically pays a spread, or higher interest rate to the seller offering the wrap. May also be referred to by the terms agreement for sale, wrap loan, or all-inclusive mortgage.

Write-Down: An accounting procedure to adjust the book value of an asset down to reflect current market value.

Write-Off: Accounting procedure to when an asset is determined to be either uncollectable or a total loss and it is removed as an asset on the books.

Yield: The actual return on an investment, whether as interest or dividends.

Yield Spread: Difference in the income or rate from a mortgage and it’s benchmark.

Zoning: The process and act by cities, municipalities and counties to divide areas and apply specific laws, restrictions and regulations based on location, usually in the areas of intended use, design and structure.

Zoning Ordinance: Regulations and laws the control the use or improvement of land and property in a particular area or zone.