Glossary of Terms

A

After Rehab Value (ARV) – The expected worth of the investment property after completed renovations
Amortization Period – The scheduled length of time the mortgage loan principal is to be paid down through regular payments
Appraisal: – Estimated value of a property assessed by an appraiser
As-is Value – A property’s current value as it stands

B

Balloon Payment – One lump sum payment due at the end of a loan contract for the remaining balance of the principal
Bridge/Short-Term Loan – A short-term or interim loan used until permanent financing is secured

C

Capital Expenditures – Profit and Loss statement line items, such as critical building systems, not charged annually
Capitalization Rate – The ratio of the first-year “asking price” to the Net Operating Income (NOI)
Closing Costs – The fees associated with the official change in ownership of the real estate property
Comparative Market Analysis – A property’s estimated value based on an analysis of comparable properties

D

Debt Service – The repeated principal and interest payments made on a loan
Debt Service Coverage Ratio (Debt Coverage Ratio) – Measures a mortgaged property’s income compared to its debt obligations
Draw Schedule – A detailed payment plan for construction or renovation projects

E

Equity – The difference between the fair market value of the property and amount owed to the lender; aka “owner’s interest”
Escrow – A legal arrangement where a third party temporarily holds money to pay for property taxes and homeowner’s insurance until consummation of the loan agreement

G

Guarantor (Surety) – A person who agrees to assume responsibility of the borrower’s debt if the borrower defaults

H

Hard Money Loan – An asset-based, higher interest rate real estate loan obtained from an individual or company
Holding Costs (Carrying Costs) – Recurring costs (insurance, utilities, property taxes, interest payments, house maintenance) associated with owning an investment property
HUD-1 – A document that lists all transactions between the buyer and seller in a real estate settlement

I

Interest – The cost for borrowing money
Interest Rate – The percentage amount charged for borrowing money

L

Lessee – Person who holds the lease on a property; tenant
Lien – A legal right against a property by a creditor filed with the county clerk
Limited Liability Company (LLC) – Business structure where individual members are not personally liable for debts
Limited Partnership (LP) – A group of investors with a general partner, who has full liability and limited partners, who are liable only for the amount they invested
Liquidity – The measure of speed that an asset can be sold, and if the price bill be above or below market value
Loan-to-Value Ratio (LTV) – The ratio of the loan to the value of the purchased asset (Loan Amount/Appraisal Value)

M

Margin – The difference between the total value of securities and the loan amount from the broker
Maturity – The termination period of a financial debt
Mezzanine/Second Loan – A loan secured by a mortgage which is secondary to another mortgage
Mixed Use Property – A real estate development that combines 2 or more different uses (residential, commercial, industrial)
Multi-Family Property Class A – Properties generally built within the last 10 years; high-end interior/exterior design and amenities; high-quality construction/materials; superior location; managed by large regional or national management companies
Multi-Family Property Class B – Properties generally built within the last 20 years or a recently renovated older property; dated interior/exterior design and amenities; good quality construction; little deferred maintenance; maintained by regional or national management companies
Multi-Family Property Class C – Properties generally built within the last 30 years or a recently renovated older property; dated interior/exterior design and amenities; “aged” improvements and deferred maintenance; majority of appliances are “original”; less than desirable areas; generally managed by smaller or local property management companies
Multi-Family Property Class D – Properties generally built over 30 years old; no amenity package; distressed properties; mediocre locations; marginal construction quality, materials, and condition
Multiple Listing Service (MLS) – A collaborative database tool to help listing brokers within an area sell their client’s property

N

Net Operating Income (NOI) – Total property revenue minus necessary operating expenses
Net-Net Lease (NN) – Tenant pays “base rent” plus a portion or all maintenance costs, property taxes, and insurance fees
Non-Recourse
– A longer-term permanent mortgage loan where the borrower is not personally responsible for repayment in the event of loan default

O

Operating Expenses – Recurring expenses (maintenance, insurance, taxes, etc) required to maintain the operation of an entity
Origination – Required steps to obtain a completed mortgage application

P

Prepayment Penalty –Fee charged by lenders for paying off all or part of your loan early
Principal – The amount of debt, minus interest, left on a loan
Proof of Funds – A document provided by a lender to show available funds for a transaction
Property Tax – Varying from state to state, taxes based on the market value of a property

R

Real Estate Broker – An individual or firm that helps their clients buy or sell their real estate property for a fee.
Real Estate Investor – An individual or firm that purchases properties with the intention of renting or reselling to make a profit
REO (Real Estate Owned) – Real estate owned by a lender that did not sell in a foreclosure auction
Return on Investment (ROI) – A measure of the amount of return on an investment compared to the cost of the investment

S

Scope of Work – This is an outline of the details of the work to be completed before the house is sold
Short Sale – When a seller sells their property for less than owed on their mortgage
Sole Proprietorship – Unincorporated business owned by a single individual

T

Term – The length of a mortgage.
Title – Legal document to show proof of ownership of a piece of real estate
Title Insurance – Indemnity insurance policy that protects lenders and homeowners from financial loss due to errors or defects in a title search
Triple-Net Lease (NNN) – A lease that requires the tenant to pay for “base rent”, as well as insurance, property taxes, and maintenance

U

Underwriting – The process of reviewing a loan application to assess the amount of risk involved, based on factors such as credit, cash flow, and credibility

Y

Yield (Rate of Return) – Annual income of an investment