General Real Estate Terms
What is Appreciation?
Appreciation refers to the increase in a property’s value over time. This can occur due to market conditions, improvements to the property, or changes in the surrounding area. There are two types:- Natural Appreciation: Market-driven increases in property value
- Forced Appreciation: Value increases due to property improvements or renovations
What is Cash Flow?
Cash Flow is the net income generated by a rental property after all expenses are paid. It’s calculated as:- Positive Cash Flow: Property generates more income than expenses
- Negative Cash Flow: Property expenses exceed rental income (like the -$282 monthly shown in your analysis)
- Cash-on-Cash Return: Annual cash flow divided by initial cash investment
What is Cap Rate (Capitalization Rate)?
Cap Rate is a metric used to evaluate the profitability of a real estate investment. It represents the rate of return on a property based on the income it generates.- Higher cap rates generally indicate higher returns but potentially higher risk
- Used to compare similar properties in the same market
- Typical ranges: 4-10% depending on property type and location
What is Net Operating Income (NOI)?
Net Operating Income (NOI) is the total income generated by a property minus operating expenses, but before mortgage payments and taxes. Operating expenses include:- Property management fees
- Maintenance and repairs
- Insurance
- Property taxes
- Utilities (if paid by owner)
- Vacancy allowance
What is Operating Margin?
Operating Margin shows how efficiently a property generates income before debt service. It’s calculated as: A 59.7% operating margin (as shown in your analysis) means the property retains about 60 cents of every rental dollar after operating expenses.What is Net Profit Margin?
Net Profit Margin includes all expenses including mortgage payments: A negative net profit margin (like -33.6% in your analysis) indicates the property loses money after all expenses.Financing Terms
What is Loan-to-Value Ratio (LTV)?
Loan-to-Value Ratio (LTV) is the percentage of a property’s value that is financed through a mortgage.- 80% LTV: 250,000 property
- Lower LTV ratios typically result in better loan terms
- Investment properties often require 20-25% down payment (75-80% LTV)
What is Debt Service Coverage Ratio (DSCR)?
Debt Service Coverage Ratio (DSCR) measures a property’s ability to pay its debt obligations.- DSCR > 1.0: Property generates enough income to cover debt payments
- DSCR < 1.0: Property doesn’t generate enough income to cover debt (like the 0.90x in your analysis)
- Lenders typically require DSCR of 1.2 or higher for investment properties
What is a Hard Money Loan?
Hard Money Loans are short-term, asset-based loans typically used for real estate investments. Characteristics:- Short terms (6 months to 3 years)
- Higher interest rates (8-15%)
- Based on property value, not borrower creditworthiness
- Quick closing (1-2 weeks)
- Fix and flip projects
- Bridge financing
- Properties that don’t qualify for traditional financing
What is Owner Financing?
Owner Financing (also called seller financing) occurs when the property seller acts as the lender. How it works:- Buyer makes payments directly to seller
- Seller retains legal title until paid in full
- Terms negotiated between buyer and seller
- Faster closing process
- Flexible terms
- May help buyers who don’t qualify for traditional loans
Investment Strategies
What is Buy and Hold?
Buy and Hold is a long-term investment strategy where investors purchase properties to rent out and hold for appreciation. Key Features:- Generate monthly rental income
- Benefit from long-term appreciation
- Build equity through mortgage paydown
- Tax advantages through depreciation
- Investors seeking passive income
- Long-term wealth building
- Tax benefits
What is Fix and Flip?
Fix and Flip involves purchasing distressed properties, renovating them, and selling them quickly for profit. Process:- Find undervalued property
- Purchase at below-market price
- Renovate to increase value
- Sell for profit
- Requires construction/renovation knowledge
- Higher risk but potentially higher returns
- Short-term capital gains tax implications
- Need sufficient capital for purchase and renovations
What is Wholesaling?
Wholesaling involves finding distressed properties under contract and assigning the contract to another investor for a fee. Process:- Find motivated seller
- Get property under contract at below-market price
- Find end buyer (usually investor)
- Assign contract for assignment fee
- Requires minimal capital
- Quick transactions
- No property ownership
- Strong marketing and negotiation skills
- Network of investors
- Understanding of local market values
What is House Hacking?
House Hacking is a strategy where you live in a multi-unit property and rent out the other units to cover your mortgage. Common Approaches:- Buy duplex, live in one unit, rent the other
- Buy single-family home, rent out rooms
- Live in one unit of a small apartment building
- Reduced living expenses
- Learn landlording while living on-site
- Qualify for owner-occupied financing (lower down payment)
- Build equity while others pay your mortgage
What is the BRRRR Strategy?
BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat - a strategy for building a rental portfolio with limited capital. Process:- Buy: Purchase distressed property below market value
- Rehab: Renovate to increase value and rental potential
- Rent: Place tenants and establish cash flow
- Refinance: Get new loan based on improved value
- Repeat: Use pulled-out equity for next investment
- Recycle initial capital
- Build portfolio faster
- Force appreciation through improvements
Property Analysis Metrics
What is the 1% Rule?
The 1% Rule is a quick screening tool that suggests monthly rent should equal at least 1% of the purchase price. Example:- 2,000/month
What is the 2% Rule?
The 2% Rule is a more aggressive version of the 1% rule, suggesting monthly rent should equal 2% of purchase price. Reality:- Very difficult to achieve in most markets
- More common in lower-cost areas
- Often indicates higher-risk investments
What is Gross Rent Multiplier (GRM)?
Gross Rent Multiplier (GRM) is used to quickly compare investment properties. Interpretation:- Lower GRM = potentially better deal
- Compare similar properties in same area
- Typical range: 4-12 depending on market
What is Price-to-Rent Ratio?
Price-to-Rent Ratio compares the purchase price to annual rental income. A 15.0:1 ratio (as shown in your analysis) means it would take 15 years of rent to equal the purchase price, which is relatively high and suggests the property may be overpriced for rental income.What is Internal Rate of Return (IRR)?
Internal Rate of Return (IRR) is the discount rate that makes the net present value of all cash flows equal to zero. What it measures:- Time value of money
- Overall return considering timing of cash flows
- Accounts for initial investment, annual cash flows, and sale proceeds
What is Cash-on-Cash Return?
Cash-on-Cash Return measures the annual return on the actual cash invested. A negative cash-on-cash return (like -6% in your analysis) means you’re losing money on your initial investment annually.Tax-Related Terms
What is Depreciation in Real Estate?
Depreciation is a tax deduction that allows you to recover the cost of income-producing property over time. Key Points:- Residential rental property: 27.5-year depreciation schedule
- Commercial property: 39-year depreciation schedule
- Only the building depreciates, not the land
- Reduces taxable income annually
What is a 1031 Exchange?
1031 Exchange (Like-Kind Exchange) allows investors to defer capital gains taxes by exchanging one investment property for another. Requirements:- Properties must be “like-kind” (investment for investment)
- Must identify replacement property within 45 days
- Must close on replacement property within 180 days
- Must use qualified intermediary
- Defer capital gains taxes
- Increase investment portfolio without tax burden
- Build wealth through tax-deferred exchanges
What is Cost Segregation?
Cost Segregation is a tax strategy that accelerates depreciation deductions by identifying property components that can be depreciated over shorter periods. How it works:- Engineering study identifies components with shorter depreciation lives
- Items like carpeting, fixtures, landscaping may qualify for 5-15 year depreciation
- Front-loads depreciation deductions
- Increased cash flow through tax savings
- Particularly beneficial for high-income investors
- Can be applied to both new purchases and existing properties
What is Passive Activity Loss?
Passive Activity Loss rules limit the ability to deduct rental property losses against other income. Key Rules:- Rental activities are generally considered passive
- Passive losses can only offset passive income
- Exception: Active participation allows up to $25,000 deduction (income limits apply)
- Real estate professionals may qualify for non-passive treatment
- Own at least 10% of property
- Make management decisions
- Approve tenants, repairs, etc.
Market Analysis Terms
What is Comparative Market Analysis (CMA)?
Comparative Market Analysis (CMA) is a method to determine property value by comparing it to similar recently sold properties. Process:- Identify comparable properties (comps)
- Analyze recent sales data
- Adjust for differences in features, condition, location
- Estimate subject property value
- Location and neighborhood
- Size and layout
- Age and condition
- Recent sale dates
- Market trends
What is After Repair Value (ARV)?
After Repair Value (ARV) is the estimated value of a property after all repairs and improvements are completed. Calculation Method:- Analyze comparable sales of similar renovated properties
- Consider scope of planned improvements
- Factor in market conditions
- Fix and flip investments
- BRRRR strategy planning
- Determining maximum purchase price
- Securing renovation financing
What is Days on Market (DOM)?
Days on Market (DOM) measures how long a property has been listed for sale. Market Indicators:- Low DOM: Hot seller’s market, properties sell quickly
- High DOM: Buyer’s market, more inventory available
- Average DOM: Balanced market conditions
- High DOM properties may have motivated sellers
- Market timing considerations for selling
- Indicator of local market conditions
What is Absorption Rate?
Absorption Rate measures how quickly available properties are sold in a specific market during a given time period. Interpretation:- High Rate: Strong demand, seller’s market
- Low Rate: Weak demand, buyer’s market
- Typically measured monthly
Property Management Terms
What is Vacancy Rate?
Vacancy Rate is the percentage of time a rental property remains unoccupied. Planning:- Budget for 5-10% vacancy rate in most markets
- Higher vacancy rates in transitional neighborhoods
- Factor into cash flow calculations (like the $88.61/month vacancy allowance in your analysis)
- Property condition and amenities
- Rental price competitiveness
- Local market conditions
- Property management quality
What is Gross Rental Yield?
Gross Rental Yield is the annual rental income as a percentage of the property’s value. Example:- Property worth 20,000 annual rent = 10% gross yield
What is Tenant Screening?
Tenant Screening is the process of evaluating potential tenants before signing a lease. Typical Screening Criteria:- Credit score and history
- Income verification (typically 3x rent)
- Employment history
- Previous rental history
- Criminal background check
- References from previous landlords
- Must comply with Fair Housing laws
- Apply criteria consistently to all applicants
- Document screening process and decisions
What is a Property Management Company?
Property Management Companies handle the day-to-day operations of rental properties for owners. Services Typically Include:- Tenant screening and placement
- Rent collection
- Maintenance coordination
- Property inspections
- Lease enforcement
- Financial reporting
- Typically 8-12% of monthly rent (like the $177.22/month shown in your analysis)
- Additional fees for tenant placement, maintenance markup
- Consider cost vs. time savings and expertise
Legal and Regulatory Terms
What is Due Diligence?
Due Diligence is the comprehensive investigation of a property before purchase. Key Components:- Property inspection
- Title search and insurance
- Survey and boundary verification
- Environmental assessments
- Financial analysis
- Market research
- Zoning and permit verification
What is Title Insurance?
Title Insurance protects property owners and lenders against losses from title defects. Types:- Owner’s Policy: Protects buyer’s equity
- Lender’s Policy: Protects lender’s interest
- Undisclosed liens
- Ownership disputes
- Forgery or fraud in title documents
- Errors in public records
What is Zoning?
Zoning refers to local government regulations that dictate how properties can be used. Common Zoning Types:- Residential: Single-family, multi-family housing
- Commercial: Retail, office, restaurants
- Industrial: Manufacturing, warehouses
- Mixed-Use: Combination of residential and commercial
- Verify current zoning allows intended use
- Research potential zoning changes
- Consider rezoning opportunities for value-add investments
What is an Environmental Site Assessment?
Environmental Site Assessment evaluates potential environmental contamination on a property. Phase I ESA:- Historical research
- Site inspection
- Regulatory database review
- Interview current and past owners
- Soil and groundwater sampling
- Laboratory analysis
- Conducted if Phase I identifies potential issues
Advanced Investment Concepts
What is Syndication?
Real Estate Syndication is a partnership between multiple investors to purchase properties too large for individual investment. Structure:- General Partners (GPs): Find, manage, and operate the investment
- Limited Partners (LPs): Provide capital, receive passive returns
- Large apartment complexes
- Commercial properties
- Development projects
- Access to larger deals
- Passive investment
- Professional management
- Diversification
What is a Real Estate Investment Trust (REIT)?
REITs are companies that own, operate, or finance income-producing real estate and trade like stocks. Types:- Equity REITs: Own and operate properties
- Mortgage REITs: Provide financing for real estate
- Hybrid REITs: Combination of equity and mortgage
- Must distribute 90% of taxable income as dividends
- Must invest 75% of assets in real estate
- Must have at least 100 shareholders
- Liquidity (can buy/sell like stocks)
- Professional management
- Diversification
- Regular dividend income
What are Opportunity Zones?
Opportunity Zones are economically distressed communities where new investments may be eligible for preferential tax treatment. Tax Benefits:- Defer capital gains taxes until 2026
- Reduce capital gains by 10-15% if held for 5-7 years
- Eliminate capital gains on Opportunity Zone investment if held 10+ years
- Invest through Qualified Opportunity Fund
- Substantially improve properties (double basis test)
- Hold investment for specified periods
- Real estate development
- Business investments
- Mixed-use projects
Risk Management
What is Landlord Insurance?
Landlord Insurance (also called rental property insurance) protects rental property owners from various risks. Coverage Types:- Property Coverage: Building structure and owner-provided contents
- Liability Coverage: Protection against lawsuits from injuries on property
- Loss of Rent: Income replacement during repairs
- Fair Rental Value: Additional living expenses if property becomes uninhabitable
- Umbrella insurance for additional liability protection
- Flood insurance (separate policy required)
- Regular policy reviews and updates
What is Asset Protection?
Asset Protection involves legal strategies to protect real estate investments from potential creditors and lawsuits. Common Strategies:- LLCs: Limited liability companies for each property
- Land Trusts: Hold title anonymously
- Homestead Exemptions: Protect primary residence
- Insurance: Comprehensive liability coverage
- Limit personal liability
- Protect against lawsuits
- Maintain privacy
- Separate business and personal assets
What is Market Risk?
Market Risk refers to the possibility that property values or rental income may decline due to market conditions. Types of Market Risk:- Economic Downturns: Recession affecting property values
- Interest Rate Changes: Impact on financing costs and buyer demand
- Local Market Changes: Job losses, population decline
- Oversupply: Too much inventory affecting rents and values
- Diversification across markets and property types
- Conservative financing
- Adequate cash reserves
- Focus on strong fundamentals (job growth, population growth)
What is Liquidity Risk?
Liquidity Risk is the risk that you cannot quickly sell a property when needed. Factors Affecting Liquidity:- Property type and condition
- Local market conditions
- Price point and financing options
- Economic environment
- Maintain cash reserves
- Avoid over-leveraging
- Choose properties in liquid markets
- Consider REITs for portion of portfolio (higher liquidity)
Understanding Your Analysis Results
Interpreting Negative Cash Flow
When your analysis shows negative cash flow (like the -$282 monthly in your example), it means:- Monthly Shortfall: You’ll need to contribute money each month to cover the difference
- Higher Risk: If rental income decreases or expenses increase, losses compound
- Appreciation Dependence: Returns rely heavily on property value increases
- Tax Benefits: Losses may provide tax deductions (consult with CPA)
What Your Metrics Mean
Based on your analysis showing:- Cap Rate: 2% - Very low, indicating poor income relative to property value
- Cash-on-Cash: -6% - Negative return on your cash investment
- DSCR: 0.90x - Property doesn’t generate enough income to cover debt service
- Operating Margin: 59.7% - Good expense control before mortgage payments
- Net Profit Margin: -33.6% - Significant losses after all expenses
Risk Assessment Factors
Your analysis shows “High Risk” (35%) due to:- Negative cash flow requiring monthly contributions
- Low cap rate compared to market standards
- Poor debt coverage with DSCR below 1.0
- High price-to-rent ratio at 15.0:1
Optimal Price Points
Your analysis suggests better cap rates at lower purchase prices:- 5% Cap Rate: $356,563 (current analysis shows 2%)
- 10% Cap Rate: $178,282
- 15% Cap Rate: $118,854
Note: This FAQ covers the most common terms in real estate investing. For specific tax, legal, or financial advice related to your situation, always consult with qualified professionals including CPAs, attorneys, and financial advisors. Need Professional Help? RealDealCPA.AI provides specialized tax and accounting services for real estate investors. Our AI-powered platform combined with expert CPAs ensures you maximize your tax benefits while staying compliant.