Real Estate Investment Glossary
Quick reference for common real estate investment terms and definitions
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A
Appreciation
The increase in property value over time due to market conditions, improvements, or inflation.
ARV (After Repair Value)
The estimated market value of a property after all repairs and renovations are completed.
Amortization
The gradual repayment of a loan through regular installments that cover both principal and interest.
C
Cap Rate (Capitalization Rate)
The ratio of Net Operating Income to property value, expressed as a percentage. Formula: NOI ÷ Property Value × 100
Cash-on-Cash Return (CoC)
Annual pre-tax cash flow divided by total cash invested. Measures return on actual money invested.
Cash Flow
The net amount of money moving in and out of a property. Positive cash flow means income exceeds expenses.
CapEx (Capital Expenditures)
Major expenses for replacing property components (roof, HVAC, water heater). Typically budgeted monthly.
Closing Costs
Fees paid at the end of a real estate transaction, including title insurance, appraisal, attorney fees, etc. Typically 2-5% of purchase price.
D
DSCR (Debt Service Coverage Ratio)
Net Operating Income divided by annual debt service. Lenders typically require 1.20-1.25 minimum.
DTI (Debt-to-Income Ratio)
Total monthly debt payments divided by gross monthly income. Used by lenders to assess borrowing capacity.
Due Diligence
The process of thoroughly investigating a property before purchase, including inspections, title search, and financial analysis.
E
Equity
The difference between property value and outstanding loan balance. Increases through appreciation and mortgage paydown.
Escrow
Money held by a third party during a transaction. Also refers to accounts for property taxes and insurance.
G
GRM (Gross Rent Multiplier)
Property price divided by gross annual rent. Used for quick property comparisons. Lower is typically better.
Gross Rental Yield
Annual rental income divided by property value, expressed as percentage. Doesn't account for expenses.
H
Hard Money Loan
Short-term, high-interest loan secured by real estate. Often used for fix-and-flip projects.
HOA (Homeowners Association)
Organization that manages a community and collects fees for shared amenities and maintenance.
L
Leverage
Using borrowed money to increase potential return on investment. A double-edged sword that amplifies both gains and losses.
LTV (Loan-to-Value Ratio)
Loan amount divided by property value. Lenders typically cap at 75-80% for investment properties.
N
NOI (Net Operating Income)
Gross rental income minus operating expenses (excludes mortgage payments). Used to calculate cap rate.
Negative Cash Flow
When property expenses exceed rental income. Investor must contribute money monthly to cover shortfall.
P
PITI
Principal, Interest, Taxes, and Insurance - the four components of a typical mortgage payment.
PMI (Private Mortgage Insurance)
Insurance required when down payment is less than 20%. Protects lender if borrower defaults.
Pro Forma
Projected financial statements showing expected income and expenses for a property.
R
ROI (Return on Investment)
Total profit divided by total investment. Accounts for all sources of return: cash flow, appreciation, tax benefits, and equity buildup.
1% Rule
Rule of thumb: monthly rent should equal at least 1% of purchase price for good cash flow.
50% Rule
Rough estimate: operating expenses will equal about 50% of gross rental income (excludes mortgage).
V
Vacancy Rate
Percentage of time property sits empty. Budget 5-10% depending on market.
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