0-9

1031 Exchange

The IRS code's Section 1031 makes it possible for a real estate investor to defer payment of capital gains taxes on an investment property upon its sale, as long as another "like kind" property is bought with the profit from the sale of the investment property.

A

Absentee Landlord

This term refers to a landlord that owns and rents out a property to earn profit and does not live on the property or in the local economic region.

Abstract of Title

This is the summary that provides details of the title deeds and documents that prove the seller/owner’s right to dispose of the property.

Accredited Investor

An accredited investor is a person that can invest in securities (i.e. invest in an apartment syndication as a limited partner) by satisfying one of the requirements regarding income or net worth. The current requirements to qualify are an annual income of $200,000 or $300,000 for joint income for the last two years with expectation of earning the same or higher or a net worth exceeding $1 million either individually or jointly with a spouse.

Acquisition Fee

The acquisition fee is the upfront fee paid by the new buying partnership entity to the general partner for finding, analyzing, evaluating, financing and closing the investment. Fees range from 3% to 5% of the purchase price, depending on the size and returns of the deal.

Adjustable Rate Mortgage (ARM)

An adjustable rate mortgage is a type of mortgage in which the rate of the outstanding balance varies throughout the life of the loan. With an adjustable rate mortgage, it is more difficult for the borrower to predict and plan for monthly payments. Traditionally, the initial interest rate will be fixed for a certain period of time until it resets from time to time, based on the current interest rates.

Adverse Possession

Adverse possession is a legal doctrine that allows a person to claim a property right in land owned by another. Common examples of adverse possession include continuous use of a private road or driveway, or agricultural development of an unused parcel of land. By favoring the adverse possessor over the true landowner, the doctrine of adverse possession rewards the productive use of land and punishes landowners who "sleep on their rights."

After Repair Value (ARV)

This estimates the future value of the property after renovations and any repairs that are made to the property. This is not the value of the property at purchase but following the improvements that are made to the property and is an estimation, not a guarantee, based on what comparable properties have recently sold for.

Amenity

An amenity is a desirable or useful feature or facility within a property structure. Amenities are typically features that are highlighted and pitched to renters when they are looking to rent at a certain complex. Amenities can also be found within gated communities or other areas that have an HOA when talking about single family homes, townhomes, or condos. Examples include a pool, workout room, on-site laundry facilities, etc.

Amortization

This is the process of spreading out a loan into a series of fixed payments over a period of time. Although a purchaser's total payment remains equal each period, the loan’s interest and principal will be paid off in different amounts each month.

Apartment Syndication

An apartment syndication is a temporary professional financial services alliance formed for the purpose of handling a large apartment transaction that would be hard or impossible for the entities involved to handle individually, which allows companies to pool their resources and share risks and returns. In regards to apartments, a syndication is typically a partnership between general partners (i.e. the syndicator) and the limited partners (i.e. the investors) to acquire, manage and sell an apartment community while sharing in the profits.

Appraisal

An appraisal will typically happen during escrow or if a person is refinancing their home. It is an unbiased professional opinion of a home’s value, based on recently sold properties nearby.

Appraised Value

Appraised value is the estimated amount from an unbiased professional of the property’s value.

Appraiser

An unbiased professional that is contracted during the escrow or refinance process to assess the value of the property in question.

Appreciation

Appreciation is an increase in the value of an asset over time. There are two main types of appreciation: natural and forced. Natural appreciation occurs when the market cap rate “naturally” decreases. Forced appreciation occurs when the net operating income is increased (either by increasing the revenue or decreasing the expenses).

APR

This stands for annual percentage rate and is charged to the borrower. It is expressed as a percentage that represents the actual yearly cost of funds over the term of the loan.

Assessed Value

The assessed value is different from the appraised value in that it is the dollar value assigned to the property to measure applicable taxes. This determines the value of a property for tax purposes and takes comparable property sales and inspections of the property into consideration.

Asset Management Fee

The asset management fee is an ongoing annual fee from the property operations paid to the general partner for property oversight. Generally, the fee is 2% of the collected income.

Asset Protection

Asset protection is a part of one’s financial planning in order to protect one’s assets from creditor claims. Both individuals and businesses use this technique to make sure they limit creditors access to claim valuable assets.

B

Bad Debt

Bad debt is the amount of uncollected money a former tenant owes after move-out.

Bad Title

A bad title is when the current sellers are not granted the ownership of title due to a multitude of reasons. These can be either legal or financial problems that lead to a bad title and therefore can prevent the seller from being able to sell the asset.

Balloon Mortgage

A balloon mortgage is a fixed rate, typically low payment loan, with a large remainder due at the end of the loan period. Frequently, these loans are re-amortized before the balloon payment comes due.

Bank Owned Property

A bank owned property is one that is taken back into a bank’s inventory after the owner defaults on the mortgage loan. This type of property is likely to be sold at a discounted price or lower than other comparables in the same location.

Breakeven Occupancy

Breakeven occupancy is the occupancy rate required to cover the all of the expenses of an apartment community. The breakeven occupancy rate is calculated by dividing the sum of the operating expenses and debt service by the gross potential income.

Bridge Loan

A bridge loan is a mortgage loan used until a person or company secures permanent financing, which are short-term (6 months to three years with the option to purchase an additional 6 months to two years). They generally have a higher interest rate and are almost exclusively interest-only. Also referred to as interim financing, gap financing or swing loan. The loan is ideal for repositioning an apartment community.

Broker

A real estate broker is not the same thing as a real estate agent. A broker is an agent that has also passed their broker license exam. The main difference between the two is that a real estate broker can also own a real estate agency or firm. Real estate agents are the ones that work for a real estate broker firm.

Broker Price Opinion

A broker price opinion is a report by a real estate agent or broker that is used to support the professional and unbiased opinion that helps determine the potential selling price. Based on comparable properties nearby that have sold recently, a BPO is used frequently by banks to price their properties for a quick sale.

Buy and Hold

The buy and hold strategy is long-term investing, where a real estate investor purchases a property with the intention of holding onto and renting it for the foreseeable future.

Buyer’s Agent

A buying agent or a purchasing agent is an agent that works with buyers to find and purchase a property. The buying agent works for a commission that is typically paid by the seller at closing.

C

Capital Expenditure

Capital expenditures, typically referred to as CapEx, are the funds used by a company to acquire, upgrade and maintain an apartment community. An expense is considered to be a capital expenditure when it improves the useful life of an apartment and is capitalized – spreading the cost of the expenditure over the useful life of the asset.

Capital expenditures include both interior and exterior renovations.

Examples of exterior CapEx are repairing or replacing a parking lot, repairing or replacing a roof, repairing, replacing or installing balconies or patios, installing carports, large landscaping projects, rebranding the community, new paint, new siding, repairing or replacing HVAC and renovating a clubhouse.

Examples of interior CapEx are new cabinetry, new countertops, new appliances, new flooring, opening up or enclosing a kitchen, new light fixtures, interior paint, plumbing projects, new blinds and new hardware (i.e. door knobs, cabinet handles, outlet covers, faucets, etc.).

Examples of things that wouldn’t be considered CapEx are operating expenses, like the costs associated with turning over a unit (i.e. paint, new carpet, cleaning, etc.), ongoing maintenance and repairs, ongoing landscaping costs, payroll to employees, utility expenses, etc.

Capital Gains Tax

When you sell an asset for more than you paid for it, you trigger what is called a capital gains tax.

Capital Improvement

Capital improvement is the addition of permanent structural changes to a property that add to the property value or adapt the property to new uses.

Capital Reserves Account

The capital reserves account is a reserves fund, over and above the price of the property, to cover things like unexpected dips in occupancy, lump sum insurance or tax payments or higher than expected capital expenditures. The capital reserves account is typically created by raising extra money from the limited partners.

Capitalization Rate

Capitalization rate, typically referred to as cap rate, is the rate of return based on the income that the property is expected to generate. The cap rate is calculated by dividing the property’s net operating income (NOI) by the current market value or purchase price of a property (NOI / Current market value = Cap Rate).

Cash Flow

Cash flow is the revenue remaining after paying all expenses. Cash flow is calculated by subtracting the operating expense and debt service from the collected revenue.

Cash On Cash Return

The cash-on-cash (CoC) return is the rate of return, expressed as a percentage, based on the cash flow and the equity investment. CoC return is calculated by dividing the cash flow by the initial investment.

Cash-Out Refinance

A cash-out refinance will replace a person’s existing mortgage with a new home loan for more than is currently owed on a property. The difference is refunded to the property owner in cash and can be spent on home improvements, debt consolidation, or any other financial needs. In order to use a cash-out refinance, a property owner would need to have built up equity in the property.

Cash Reserves

Cash reserves refer to the money an individual has set aside for unexpected expenses like home improvement emergencies, such as plumbing issues, appliance replacements, flooding, etc., as well as vacancies, capital expenditures, and non-paying tenants.

Certificate of Title

This is the state-issued document that identifies the owner of real property. A certificate of title provides documentary evidence of the right of ownership so that the seller is actually able to transfer title and sell a property.

Certified Commercial Investment Member (CCIM)

A CCIM (Certified Commercial Investment Member) is a recognized expert in the commercial and investment real estate industry. The designation process ensures that CCIMs are proficient not only in theory, but also in practice.

Chain of Title

This is the sequence of historical transfers of a title of real property from sellers to buyers. This is a valuable tool to identify the past owners of any given property. This chain will follow the title from the original owners to the current owners.

Clear Title

A clear title is a title that is clear of any type of lien or anything else that might pose a question about legal ownership. An owner with a clear title has legal ownership of the title and property and is able to transfer this title legally to a purchaser.

Closing

The closing is when the buyer and seller sign the official papers to transfer ownership.

Closing Costs

Closing costs are the expenses, over and above the price of the property, that buyers and sellers normally incur to complete a real estate transaction. Examples of closing costs are legal fees, insurance, survey, recording fees, 3rd party reports, title endorsements, utility deposit, and due diligence fees.

Cloud on Title

This is a document, claim, or unreleased lien that might invalidate or make it difficult to transfer a title. Cloud on title is usually discovered during the title search once a property is under contract.

Co-Borrower

A co-borrower is the second person on a mortgage loan. This can be anyone from a parent or friend to a significant other or spouse. Co-borrowers are used to help qualify for a loan and are also equally responsible for the mortgage should the initial borrower default.

Commercial Real Estate (CRE)

A commercial property refers to a real estate property that is used for business purposes or large scale residential dwellings, such as apartment buildings.

Comparative Market Analysis (CMA)

This is an examination of the prices of different properties within the same area as the property a buyer is considering for purchase. Real estate agents perform this analysis to determine an accurate listing price.

Concessions

Concessions are the credits (dollars) given to offset rent, application fees, move-in fees and any other revenue line time, which are generally given to tenants at move-in.

Consumer Price Index

The Consumer Price Index indicates how much prices of consumer goods and services have increased over a set period of time.

Contingency Clause

A contingency clause is a portion of a contract that will require certain things to take place before the contract can be considered valid. This often is a part of a conditional offer made on a property during a real estate transaction.

Contract For Deed

A Contract for Deed is a tool that can allow buyers who either don't qualify for traditional lending options or who want a faster financing option to purchase property.

Co-Tenancy Clause

A co-tenancy clause in retail lease contracts allows tenants to reduce their rent if key tenants or a certain number of tenants leave the retail space.

Covenants, Conditions & Restrictions (CC&R)

Covenants, Conditions & Restrictions, commonly called CC&Rs, are a set of rules established by a developer or homeowners association that govern residences in a particular neighborhood or condominium. CC&Rs may put restrictions on parking, paint colors, noise-levels and pets, for example.

Curb Appeal

This term is often used to describe the appeal of a property for sale when the property is viewed from the street.

D

Debt Service

Debt service is the annual mortgage paid to the lender, which includes principal and interest. Principal is the original sum lent and the interest is the charge for the privilege of borrowing the principal amount.

Debt Service Coverage Ratio (DSCR)

The debt service coverage ratio (DSCR) is a ratio that is a measure of the cash flow available to pay the debt obligation. DSCR is calculated by dividing the net operating income by the total debt service. A DSCR of 1.0 means that there is enough net operating income to cover 100% of the debt service. Ideally, the ratio is 1.25 or higher. An apartment with a DSCR too close to 1.0 is vulnerable, and a minor decline in cash flow would result in the inability to service (i.e. pay) the debt.

Debt-to-Income Ratio (DTI)

A buyer’s debt-to-income ratio compares how much a buyer owes monthly versus how much they earn monthly. This ratio is used during the underwriting process of escrow to determine how much house you can afford as a buyer. More specifically, it is the percentage of gross monthly income that goes toward payments for rent, mortgages, credit cards, car payments, or any other debt the buyer possesses.

Deed

A deed is a legal document that passes and confirms an interest, right, or property and is signed, attested, delivered, and sealed. It is commonly associated with transferring the title of a property from the seller to the buyer.

Deed Book

Deed books can be found at the county courthouse and are under the jurisdiction of the registrar of deeds. The deed book contains the record of property transfers.

Deed Of Trust (DOT)

A Deed of Trust is a type of secured real-estate transaction that some states use instead of mortgages. A deed of trust involves three parties: a lender, a borrower, and a trustee. The lender gives the borrower money. In exchange, the borrower gives the lender one or more promissory notes.

Default

Within real estate, default is when a property owner fails to make monthly mortgage payments and therefore defaults on their mortgage loan. When the mortgage payments are not made and a borrower defaults on the loan, the property can then be taken away by the lender through a process called foreclosure.

Deficiency Balance

This is the amount of the loan that remains unpaid after the lender has taken the property back from the owner.

Delinquent

This term is typically used when a borrower is late or overdue on a mortgage payment.

Depreciation

This term is the opposite of appreciation when considering a real estate property. Depreciation is when a property decreases in value.

Distributions

Distributions are the limited partner’s portion of the profits, which are sent on a monthly, quarterly or annual basis, at refinance and/or at sale.

Downturn

Downturn is when the economy or real estate market has softened, resulting in properties typically taking longer to sell.

Dual Agency

Dual agency is when a real estate agent represents both the buyer and the seller in a single transaction.

Due On Sale Clause (DOS)

A due-on-sale clause is a clause in a loan or promissory note that stipulates that the full balance of the loan may be called due (repaid in full) upon sale or transfer of ownership of the property used to secure the note. The lender has the right, but not the obligation, to call the note due in such a circumstance.

E

Earnest Money

After an offer is accepted, a deposit is made to the seller by the buyer as a symbol of good faith that you will be following through on buying the property. This deposit can be forfeited if the buyer does not follow through on the purchase.

Easement

Easement is the legal right to use someone else’s land for a specific and limited purpose. When someone is granted an easement, they are legally allowed to use the property, but the property title and ownership remain in the possession of the owner.

Economic Vacancy

The economic vacancy is the rate of tenants who are living at the apartment but not paying you to live there. The economic vacancy is calculated by dividing the actual revenue collected by the gross scheduled rents.

Effective Gross Income

Effective gross income (EGI) is the true positive cash flow of an apartment community. EGI is calculated by the sum of the gross potential rent and the other income minus the income lost due to vacancy, loss-to-lease, concessions, employee units, model units and bad debt.

Egress

When buying a property, there are certain things that qualify a room as “conforming” or “non-comforming.” For example, a basement room with regular windows would be considered a “non-comforming” bedroom. Egress is a way to exit the property, and in order for a room to be a legal bedroom, it must have two points of egress or exit.

Ejectment

This is a common law term for the civil action to recover the possession of a title to the land.

Eminent Domain

Eminent domain refers to the right of the government to take private property and convert it to public use.

Employee Unit

An employee unit is a unit rented to an employee at a discount.

Equity

Equity is the difference between the market value of a property and the amount of money that is still owed on the loan. Equity can accrue naturally through the market or can be forced into the home based on improvements made by the owner.

Equity Multiplier

Equity Multiplier (EM) is the rate of return based on the total net profit (cash flow plus sales proceeds) and the equity investment. EM is calculated by adding the sum of the total net profit and the gross cash flow and dividing it by the equity investment.

Equity Stripping

This is a set of strategies designed to reduce overall equity in a property. These can be used by debtors as means of making properties unattractive to creditors.

Escrow Agent

An escrow agent is the person that holds property in trust for third parties while a transaction is finalized on the property in question.

Escrow Agreement

This is the contract that defines an arrangement between parties where one party deposits an asset with a third party. This third party then delivers the asset to the second party when the conditions of the contract are met.

Estate

A word with deep legal origins, “estate” has been consistently defined for centuries while adapting to the needs of the times. In essence, one’s estate is everything they own; it’s everything that belongs to a person.

Eviction

The legal method for removing a tenant from a rental property. Eviction typically takes place after the tenant fails to make their monthly rent payments on time.

Exit Strategy

The exit strategy is the plan of action for selling the apartment community at the end of the business plan.

F

Fair Housing Act

The Fair Housing Act was initiated to make sure that everyone who applies for housing has the right to be treated the same. For landlords, this means you cannot discriminate against potential tenants based on color, disability, familial status, national origin, race, religion, or sex.

Fair Market Rent (FMR)

Fair market rent (FMR) is the monthly rent a particular property type is likely to receive.

Fair Market Value (FMV)

This is an estimate of the market value of a property. At its simplest, it is the price that a property would sell for in a fair and open market.

Federal Housing Administration (FHA)

The Federal Housing Administration, generally known as "FHA", provides mortgage insurance on loans made by FHA-approved lenders throughout the United States and its territories.

Fee Simple

A fee simple represents absolute ownership of land; therefore, the owner may do whatever he or she chooses with the land.

FHA Loan

This is a type of mortgage loan that is insured by the Federal Housing Administration. These types of loans are popular among first time home buyers due to the low down payment requirements—as low as 3.5%—as well as a more lenient credit score requirement.

Financing Fees

Financing fees are the one-time, upfront fees charged by the lender for providing the debt service. Also referred to as loan points or loan point cost. Typically, the financing fees are 1% to 2% of the loan amount.

First Mortgage

This is the first mortgage loan on a property and has priority over all other liens or claims on a property in the event of a default on the home.

Fix and Flip

This term is coined for properties that need a lot of rehab to make them appealing to buyers. Real estate investors will buy the property, renovate it, and resell the property for a profit.

Fixed Price Purchase Option

A fixed price purchase option is the right, but not the obligation, to buy a leased property at the end of a lease term at a price determined from the onset of the lease agreement.

Fixed Rate Mortgage

This is a fully amortizing mortgage loan where the interest rate on the note remains the same through the term of the loan.

Forced Equity

Forced equity is equity that is instantly put into the home by making improvements to it. By improving the home, you not only increase the home's market value, but also increase the market rent, which permits you to make more money each month and pay off your property faster. This is the best way to build equity in a home versus waiting for the home’s market value to increase naturally.

Foreclosure

Foreclosure is the legal process in which a lender or bank takes control of a property, and sells the property after an owner is unable to make full principal and interest payments on his or her mortgage, as decided upon in the mortgage contract.

For Sale By Owner (FSBO)

For sale by owner is a process by which an owner sells their property directly instead of going through a brokerage firm to sell the property. The benefit to the seller is that there is no commission to pay out at the end of the selling process.

Fractional Ownership

Fractional ownership is a method in which several unrelated parties can share in, and mitigate the risk of, ownership of a real estate property.

Freddie Mac

Federal Home Loan Mortgage Corporation (Freddie Mac) A private corporation founded by Congress, the Federal Home Loan Mortgage corporation's mission is to promote stability and affordability in the housing market by purchasing mortgages from banks and other loan makers.

G

Guaranty Fee

The guaranty fee is a fee paid to a loan guarantor at closing. The loan guarantor guarantees the loan. At closing of the loan, a fee of 0.25% to 1% of the principal balance of the mortgage loan is typically paid to the loan guarantor.

General Partner

The general partner (GP) is an owner of a partnership who has unlimited liability. A general partner is also usually a managing partner and active in the day-to-day operations of the business. In apartment syndications, the GP is also referred to as the sponsor, syndicator, or operator. The GP is responsible for managing the entire apartment project.

Gentrification

Gentrification is a process where a neighborhood undergoes urban development, involving an influx of higher-income residents to an otherwise abandoned or rundown area. Gentrification is a controversial political and social topic.

Gift Of Equity

The gift of equity is when a family member sells you a property for below market value. This difference is considered an amount of equity. This equity can be used toward the down payment or to help pay off debt in order to qualify to buy the home.

Ginnie Mae (GNMA)

The Government National Mortgage Association (commonly referred to as Ginnie Mae is a U.S. government corporation that guarantees the timely payment of principal and interest on mortgage-backed securities (MBSs) issued by approved Ginnie Mae lenders.

Graduated Lease

Graduated lease refers to an agreement under which a tenant and landlord agree to a periodic adjustment of monthly payments. This typically occurs when the market conditions increase and the landlord then needs to increase the price on the lease.

Gross Potential Income

The gross potential income is the hypothetical amount of revenue if the apartment community was 100% leased year-round at market rates plus all other income.

Gross Potential Rent

The gross potential rent (GPR) is the hypothetical amount of revenue if the apartment community was 100% leased year-round at market rental rates.

Gross Rent Multiplier (GRM)

The gross rent multiplier (GRM) is the number of years the apartment would take to pay for itself based on the gross potential rent (GPR). The GRM is calculated by dividing the purchase price by the annual GPR.

Ground Lease

A ground lease refers to an agreement between a tenant and a property owner that allows the tenant to develop a piece of property during the lease period. After the lease, all of these developments are to be transferred over to the property owner.

H

Hard Money Lender (HML)

A hard money lender is a private lender that uses property collateral instead of credit scores in order to qualify lending a buyer money.

Hard Money Loan

Hard money is a way to borrow without using traditional mortgage lenders. Loans come from individuals or investors who lend money based (for the most part) on the property you’re using as collateral and not based on credit scores. When loans need to happen quickly, or when traditional lenders will not approve a loan, hard money may be the only option.

Hazard Insurance

Hazard insurance protects an owner against the costs of damage from fire, vandalism, smoke, and other causes. When you take out a mortgage, the lender will require you to take out hazard insurance to protect their investment; many lenders will incorporate the insurance payment into your monthly mortgage payment.

HELOC

A home equity line of credit (HELOC) is when a property owner borrows money against the equity that has been built up in said property.

Holding Costs

When real estate investors purchase property, their main goal is to sell the property for a profit. But during this process, the investor must take into consideration the amount of money they will need to pay out before the investment is re-sold. Holding costs are also known as carrying costs. When calculating the holding costs, investors must include the purchase price, and deduct operating income to come to an estimated figure.

Home Appraisal

Real estate appraisal, property valuation or land valuation is the process of developing an opinion of value, for real property. Real estate transactions often require appraisals because they occur infrequently and every property is unique, unlike corporate stocks, which are traded daily and are identical.

Home Equity

This is the current market value of your home, minus what a borrower still owes on a mortgage.

Home Equity Loan

A home equity loan is a type of loan in which the borrower uses the equity of his or her home as collateral.

Home Inspection

A home inspection is something that a home buyer will pay to have conducted during the escrow period. A home inspector will come to the property and look at different aspects of the home that may deter a buyer from wanting to follow through with the purchase.

Homeowner’s Association (HOA)

The primary purpose of a homeowners association is to manage a large property’s or neighborhood's common areas, such as roads, parks, and pools. Owners are obligated to pay dues which vary depending on the building/neighborhood and its amenities. This is an added monthly expense on top of a mortgage payment.

Home Warranty

A home warranty is an annual service contract that covers the repair or replacement of important appliances’ and systems’ components in the event they break down.

House Hacking

House hacking is a strategy in which the property owner lives within the investment property and lives for free (or almost free) based on other tenants paying rent that covers the whole mortgage. This strategy is typically done with a multifamily unit but can also be done in single family homes by renting out extra rooms.

Housing Starts

Housing starts is the number of new projects for residential construction that began over the duration of any given month—and is a pivotal economic indicator.

I

Individual Retirement Account (IRA)

An IRA is an account set up at a financial institution that allows an individual to save for retirement with tax-free growth or on a tax-deferred basis.

Inflation

In simple terms, inflation is a quantitative measure of the rate at which the average price level of a basket of selected goods and services in an economy increases over a period of time.

Ingress

The right to enter a property.

Interest Rate

The interest rate is the amount charged, expressed as a percentage of principal, by a lender to a borrower for the use of their funds.

Interest Only Payment

An interest-only payment is the monthly payment on a loan where the lender only requires the borrower to pay the interest on the principal as opposed to the typical debt service, which requires the borrower to pay principal plus interest.

Interim Interest

Mortgage interim interest refers to the interest that accrues on your mortgage between the closing date and the date of record. This is the time between when you close on the mortgage and the end of the month.

Internal Rate Of Return (IRR)

The internal rate of return (IRR) is the rate, expressed as a percentage, needed to convert the sum of all future uneven cash flow (cash flow, sales proceeds and principal pay down) to equal the equity investment. IRR is one of the main factors the passive investor should focus on when qualifying a deal.

Intestate

Intestate refers to when a person dies before determining a will. An intestate estate is also one in which the will presented to the court was deemed to be invalid.

J

Joint Tenancy

The holding of an estate or property jointly by two or more parties, the share of each passing to the other or others on death.

Joint Tenants

In estate law, joint tenancy is a special form of ownership by two or more persons of the same property. The individuals, who are called joint tenants, share equal ownership of the property and have the equal, undivided right to keep or dispose of the property.

Joint Venture (JV)

A commercial enterprise undertaken jointly by two or more parties which otherwise retain their distinct identities.

Judicial Foreclosure

Judicial foreclosure refers to foreclosure cases that go through the court system.

Jumbo Loan

A jumbo loan is a type of mortgage that is used to finance real estate that is too expensive for a conventional conforming loan.

K

K-1

The Schedule K-1 is an Internal Revenue Service (IRS) tax form issued annually for an investment in partnership interests. The purpose of the Schedule K-1 is to report each partner's share of the partnership's earnings, losses, deductions, and credits.

L

Landlord

A person or company who owns property that they allow other people to live in, in exchange for monthly rent.

Land Trust

A land trust is a legal entity that takes ownership of, or authority over, a piece of property at the behest of the property owner.

Land Value

Land value is the value of a piece of property, including both the value of the land itself as well as any improvements that have been made to the property over time.

Lease

The legally binding contract that governs the circumstances in which a landlord will rent their property to a tenant.

Lease Option (L/O)

A lease option is an agreement that gives a renter a choice to purchase the rented property during or at the end of the rental period.

Lender

Lenders are people or companies that allow you to borrow money with the promise that it will be repaid. Repayment includes principal and interest, and may include monthly payments or a lump sum payment.

Lessee

A lessee is a person who rents land or property from a lessor. The lessee is also known as the "tenant" and must uphold specific obligations as defined in the lease agreement and by law.

Lessor

The lessor is the property owner or landlord that rents out the property to the lessee.

Leverage

Leverage is the use of various financial instruments or borrowed capital—in other words, debt—to increase the potential return of an investment. It is commonly used when talking about the real estate market.

Lien

A legal interest in a property, which must be paid in full before the property can be sold. If there is a lien on a property, this is typically identified in the escrow process and will break the contract.

Lien Waiver

In the mechanics lien process, a lien waiver is a document from a contractor, subcontractor, materials supplier, equipment lessor or other party to the construction project stating they have received payment and waive any future lien rights to the property for the amount paid.

Limited Partner

The limited partner (LP) is a partner whose liability is limited to the extent of the partner’s share of ownership. In apartment syndications, the LP is the passive investor and funds a portion of the equity investment.

Line Of Credit (LOC)

A line of credit is a preset amount of money that a bank or credit union has agreed to lend you. You can draw from the line of credit when you need it, up to the maximum amount. You'll pay interest on the amount you borrow.

Listing

A listing is what a property for sale is often referred to as by a real estate broker or agent.

List Price

The price at which a property is listed by the seller.

Loan Estimate

A loan estimate is a three-page form that a potential borrower receives after applying for a mortgage. The loan estimate tells the borrower important details about the loan requested. The form provides important information, including the estimated interest rate, monthly payment, and total closing costs for the loan.

Loan Policy

A loan policy protects the lender's interests and is based on the dollar amount someone is borrowing from the bank, not on the full value of the property.

Loan-To-Value (LTV)

The loan-to-value (LTV) ratio is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased.

London Interbank Offered Rate

The London Interbank Offered Rate (LIBOR) is a benchmark rate that some of the world’s leading banks charge each other for short-term loans. LIBOR serves as the first step to calculating interest rates on various loans, including commercial loans, throughout the world.

Loss to Lease

Loss to lease (LtL) is the revenue lost based on the market rent and the actual rent. LtL is calculated by taking the gross potential market rent and subtracting the gross scheduled rents.

M

Market Rent

The market rent is the rent amount a willing landlord might reasonably expect to receive, and a willing tenant might reasonably expect to pay for a tenancy, which is based on the rent charged at similar apartment communities in the area. Market rent is typically calculated by performing a rent comparable analysis.

Market Value

Market value is the price an asset would fetch in the marketplace.

Maximum Allowable Offer (MAO)

Maximum allowable offer (MAO) is the maximum price point at which investors in a real estate deal can realistically expect to pull in a profit while minimizing the risk of losing money.

Metropolitan Statistical Area

A metropolitan statistical area (MSA) is a geographical region containing a substantial population nucleus, together with adjacent communities having a high degree of economic and social integration with that core, which are determined by the United States Office of Management and Budget (OMB).

Model Unit

A model unit is a representative apartment unit used as a sales tool to show prospective tenants how the actual unit will appear once occupied.

Mortgage

A mortgage is a legal agreement by which a bank or other creditor lends money at interest in exchange for taking title of the debtor's property, with the condition that the conveyance of title becomes void upon the payment of the debt.

Mortgage Broker

Mortgage brokers are mortgage experts who provide different lenders, loan types, and rates for buyers without upfront charges.

Multifamily

A building or structure that is designed to house several different families in separate housing units.

Multiple Listing Service (MLS)

A multiple listing service is a service used by a group of real estate brokers. Once a buyer begins working with a real estate agent/broker, they will typically be set up with an MLS email drip that will send new listings every day.

N

National Housing Act

The American Housing Act of 1949 was a sweeping expansion of the federal role in mortgage insurance and issuance and the construction of public housing.

Negative Equity

Negative equity occurs when the value of real estate property falls below the outstanding balance on the mortgage used to purchase that property. Negative equity is calculated by taking the current market value of the property and subtracting the balance on the outstanding mortgage.

Net Operating Income

Net operating income (NOI) is all revenue from the property minus operating expenses, excluding capital expenditures and debt service.

Net Worth

Financial resources or other wealth belonging to a particular person, especially when used for investment purposes.

No-Appraisal Refinancing

A no-appraisal mortgage is a type of home loan refinancing for which the lender does not require an appraisal, meaning an independent opinion of the property's current fair market value is not necessary.

Note

Mortgage notes are a written promise to repay a specified sum of money plus interest at a specified rate and length of time to fulfill the promise.

O

Offer

An offer is when a buyer puts in a price offer on a home that the seller can accept or counter.

Open House

An open house is held by the selling agent in order for prospective buyers to come and look at a property. It enables interested parties to view property without scheduling a showing with their agent.

Open Listing

An “open listing” is a non-exclusive real estate contract in which more than one broker may be employed to sell a property, including the owners themselves.

Operating Expenses

Operating expenses are the costs of running and maintaining the property and its grounds.

Owner Occupied (OO)

Owner-occupancy or home-ownership is a form of housing tenure where a person, called the owner-occupier, owner-occupant, or home owner, owns the home in which they live.

P

Permanent Agency Loan

A permanent agency loan is a long-term mortgage loan secured from Fannie Mae or Freddie Mac and is longer-term with lower interest rates compared to bridge loans. Typical loan term lengths are 5, 7 or 10 years amortized over 20 to 30 years.

Personal Use Property

Personal use property is a type of property that an individual does not use for business purposes or as an investment.

Physical Occupancy Rate

The physical occupancy rate is the rate of occupied units. The physical occupancy rate is calculated by dividing the total number of occupied units by the total number of units.

Pocket Listing

A pocket listing is a signed real estate listing that is not entered into the multiple listing service, or MLS.

Power Of Sale

Power of sale is a clause written into a mortgage note authorizing the mortgagee to sell the property in the event of default in order to repay the mortgage debt.

Pre-Approval Letter

A pre-approval letter is a document that states the loan amount a lender is willing to extend to a borrower. It is not a guarantee to lend, but it carries significant weight, especially to other parties in a real estate transaction, such as agents and sellers.

Preferred Return

Preferred Return is the threshold return that limited partners are offered prior to the general partners receiving payment.

Prepayment Penalty

A prepayment penalty is a clause in a mortgage contract stating that a penalty will be assessed if the mortgage is paid down or paid off within a certain period.

Price Per Unit

Price per unit is the cost of purchasing an apartment community based on the purchase price and the number of units. The price (or cost) per unit is calculated by dividing the purchase price by the number of units.

Private Mortgage Insurance

Private mortgage insurance, also called PMI, is a type of mortgage insurance buyers might be required to have if he or she uses anything other than a conventional loan. Like other kinds of mortgage insurance, PMI protects the lender if the buyer stops making monthly loan payments.

Private Placement Memorandum

The private placement memorandum (PPM) is a document that outlines the terms of the investment and the primary risk factors involved with making the investment. The four main sections are the introduction, which is a brief summary of the offering, the basic disclosures, which includes general partner information, asset description and risk factors, the legal agreement and the subscription agreement.

Pro Forma

A pro forma is the projected budget of an apartment community with itemized line items for the income and expense for a specified period which is an output of underwriting.

Probate

Probate is the legal process through which a deceased person's estate is properly distributed to heirs and designated beneficiaries and any debt owed to creditors is paid off.

Profit and Loss Statement

The profit and loss statement is a document or spreadsheet containing detailed information about the revenue and expenses of the apartment community over the last 12 months. Also referred to as a trailing 12-month profit and loss statement or a T12.

Proof Of Funds

Proof of funds is a document that stipulates that a buyer is financially capable of securing a mortgage or has the funds necessary to make an all-cash purchase in a real estate transaction.

Property and Neighborhood Classes

Property and neighborhood classes is a ranking system of A, B, C, or D given to a property or a neighborhood based on a variety of factors. These classes tend to be subjective, but the following are good guidelines:

Property Classes:

Class A: new construction, command highest rents in the area, high-end amenities

Class B: 10 – 15 years old, well maintained, blue & white collar tenant

Class C: built within the last 25 years, shows age, blue collar tenant

Class D: over 30 years old, no amenity package, low occupancy, needs work

Neighborhood Classes:

Class A: most affluent neighborhood, expensive homes nearby

Class B: middle class part of town, safe neighborhood

Class C: low-to-moderate income neighborhood

Class D: high crime, very bad neighborhood

Property Management Fee

The property management fee is an ongoing monthly fee paid to the property management company for managing the day-to-day operations of the property. This fee ranges from 2% to 8% of the total monthly collected revenues of the property, depending on the size of the deal.

Property Manager

A property manager is an individual or a company that is hired by a property owner in order to run the rental property. Typically property owners will hire a property management company to run it day to day because they are unwilling or don’t have the time to do so.

Q

Quiet Title

A quiet title action is a circuit court action, or lawsuit, intended to establish or settle the title to a property, especially when there is a disagreement. It is a lawsuit brought to remove a claim or objection on a title.

Quitclaim Deed

Quitclaim deeds are most often used to transfer property within a family. For example, when an owner gets married and wants to add a spouse's name to the title or when the owners divorce and one spouse's name is removed from the title.

R

Real Estate

Real estate refers to property containing land, buildings, or both.

Real Estate Agent

Real estate agents are licensed professionals who arrange real estate transactions for either a buyer or a seller.

Real Estate Broker

Real estate broker’s are real estate agents but with a broker’s license. They work for a real estate brokerage and assist buyers or sellers in the transfer of ownership of a property, much like a real estate agent.

Real Estate Owned (REO)

Real estate owned (REO) is the name given to foreclosed-upon real estate. This happens when a borrower fails to make monthly mortgage payments and therefore defaults on the loan. In this case, the property goes back to the bank or lender for sale. It is typically sold at a discounted price.

Realtor

A person who acts as an agent for the sale and purchase of buildings and land; a real estate agent.

Recession

A period of temporary economic decline during which trade and industrial activity are reduced, generally identified by a fall in GDP in two successive quarters.

Refinance

A refinance is the replacing of an existing debt obligation with another debt obligation with different terms. In apartment syndication, a distressed or value-add general partner may refinance after increasing the value of a property, using the proceeds to return a portion of the limited partner’s equity investment.

Refinance Rate

One of the best reasons to refinance is to lower the interest rate on your existing loan. Historically, the rule of thumb is that refinancing is a good idea if you can reduce your interest rate by at least 2%. However, many lenders say 1% savings is enough of an incentive to refinance.

Refinancing Fee

The refinancing fee is a fee paid for the work required to refinance the property. At closing of the new loan, a fee of 0.5% to 2% of the total loan amount is paid to the general partner.

REIT

REIT stands for real estate investment trust. Essentially, REITs are corporations that own and manage a portfolio of real estate properties and mortgages.

Rent Comparable Analysis

The rent comparable analysis is the process of analyzing similar apartment communities in the area to determine market rents of the subject apartment community.

Rent Premium

A rent premium is the increase in rent after performing renovations to the interior or exterior of an apartment community. The rent premium is an assumption made by the general partner during the underwriting process based on the rental rates of similar units in the area or previously renovated units.

Rent Roll

The rent roll is a document or spreadsheet containing detailed information on each of the units at the apartment community, along with a variety of data tables with summarized income.

Rent To Own Homes (RTO)

Rent-to-own is when a tenant signs a rental agreement or lease that has an option to buy the house or condo later — usually within three years. The renter's monthly payments will include rent payments and additional payments that will go towards a down payment for purchasing the home.

Reserve Fund

A reserve fund is a savings account or other highly liquid asset set aside by an individual or business to meet any future costs or financial obligations, especially those arising unexpectedly.

Residential Rental Property

Residential rental property is a type of rented real property, such as a house or apartment complex.

Residential Utility Billing System

Residential Utility Billing System (RUBS) is a method of calculating a tenant’s utility bill based on occupancy, apartment square footage or a combination of both. Once calculated, the amount is billed back to the resident, which results in an increase in revenue.

Return On Investment (ROI)

Return on investment (ROI) measures how much money or net profit is made on an investment, displayed as a percentage of the cost of that investment.

Reverse Exchange

A reverse 1031 exchange is a tax deferment strategy that allows real estate investors to purchase a second investment property before selling their relinquished investment property—and importantly, defer capital gains taxes and other taxes that you would normally need to pay upon sale of a property.

Reverse Mortgage

A financial agreement in which an owner relinquishes equity in their property in exchange for regular payments, typically to supplement retirement income.

Rural Housing Service

USDA's multifamily housing programs that offer loans to provide affordable rental housing for very low-, low-, and moderate-income residents, the elderly, and persons with disabilities.

S

Sales and Purchase Agreement

A sales and purchase agreement (SPA) is a legal contract that obligates a buyer to buy and a seller to sell a product or service. SPAs are found in all types of businesses but are most often associated with real estate deals as a way of finalizing the interests of both parties before closing the deal.

Sales Proceeds

The sales proceeds are the profit collected at the sale of the apartment community.

Security Deposit

A security deposit is a paid amount of money to the landlord meant to ensure that rent will be paid and other responsibilities of the lease performed (e.g., paying for damage caused by the tenant). The laws surrounding these deposits vary from state to state.

Seller-Financed Sale

Seller financing is a loan provided by the seller of a property or business to the purchaser.

Seller-Paid Points

Seller's points (or seller contributions) are lump sum payments (or finance charges) made by the seller to the buyer's lender to reduce the cost of the loan to the buyer.

Shared Equity Finance Agreements

A shared equity finance agreement is a financial agreement entered into by two parties who would like to purchase a piece of real estate together.

Short Refinance

A short refinance is a transaction in which a lender agrees to refinance a borrower's home for the current market value, in effect making it more cost effective for the borrower.

Short Sale

A short sale is a sale of real estate in which the net proceeds from selling the property will fall short of the debts secured by liens against the property.

Sophisticated Investor

A sophisticated investor is a person who is deemed to have sufficient investing experience and knowledge to weigh the risks and merits of an investment opportunity.

Squatter

A person who unlawfully occupies an uninhabited building or unused land.

Subject Property

The subject property is the apartment the general partner intends on purchasing.

Sublease

Lease from one tenant (lessee) to another (called subtenant or sublessee). The agreement between the landlord (the lessor) and the first lessee remains in force and governs the terms of the sublease.

Submarket

The submarket is a geographic subdivision of a market.

Subscription Agreement

A subscription agreement is an agreement between a company and investor(s) that sets out the price and terms of a purchase of shares in the company. The subscription agreement details the rights and obligations associated with the share purchase.

Syndicate

A syndicate is a temporary, professional financial services alliance formed for the purpose of handling a large transaction that would be hard or impossible for the entities involved to handle individually.

Syndication

Real estate syndication is an effective way for investors to pool their financial and intellectual resources to invest in properties and projects much bigger than they could afford or manage on their own.

T

Tax Lien

A tax lien is the government's claim on your property and is generally placed when a taxpayer, such as a business or individual, fails to pay taxes owed.

Tenancy In Common

Tenancy in common is a specific type of concurrent, or simultaneous, ownership of real property by two or more parties. All tenants in common hold an individual, undivided ownership interest in the property. This means that each party has the right to alienate or transfer their ownership interest.

Tenants By Entirety

Tenants by entirety (TBE) is a method in some states by which married couples can hold the title to a property. In order for one spouse to modify his or her interest in the property in any way, the consent of both spouses is required by tenants by entirety.

Tenement

Also called tenement house, a run-down and often overcrowded apartment house, especially in a poor section of a large city. By law, any species of permanent property, such as lands, houses, rents, an office, or a franchise, that may be held by another.

Timeshare

A timeshare (sometimes called vacation ownership) is a property with a divided form of ownership or use rights. These properties are typically resort condominium units, in which multiple parties hold rights to use the property, and each owner of the same accommodation is allotted a period of time.

Title

In property law, a title is a bundle of rights in a piece of property in which a party may own either a legal interest or equitable interest.

Title Commitment

A title commitment (or whatever name yours goes by) is basically the title company's promise to issue a title insurance policy for the property after closing. The title commitment contains the same terms, conditions, and exclusions that will be in the actual insurance policy.

Title Defect

A title defect refers to any potential threat to the current owner's full right or claim to sell a property. The property has a publicly-recorded issue, like a lien, mortgage, or judgment, that gives another party a claim to the property.

Title Insurance

Every title insurance policy covers either an owner or the lender that financed the mortgage for the property. Lenders require you to pay for lender's title insurance as part of your mortgage closing costs. Title insurance is generally paid for by the seller or the buyer of the property.

Title Search

A title search is done to verify the seller's right to transfer ownership. It is used to discover any claims, errors, assessments, debts, or other restrictions on the property.

Triple Net Lease (NNN)

A triple net lease (triple-Net or NNN) is a lease agreement on a property whereby the tenant or lessee promises to pay all the expenses of the property including real estate taxes, building insurance, and maintenance.

Truth In Lending

The Truth in Lending Act (TILA) is a federal law passed in 1968 to ensure that consumers are treated fairly by businesses in the lending marketplace and are informed about the true cost of credit.

Turnkey

A turnkey property is a fully renovated home or apartment building that an investor can purchase and immediately rent out.

U

Under Contract

In real estate, being “under contract” means that a buyer’s offer has been accepted by the seller.

Underwriting

Underwriting is the process of financially evaluating an apartment community to determine the projected returns and an offer price.

Unsecured Loan

An unsecured loan is a loan that is issued and supported only by the borrower's creditworthiness, rather than by any type of collateral.

Use and Occupancy

Use and occupancy (U&O) refers to a type of permit required by some local governments whenever real property is transferred.

V

Vacancy Loss

Vacancy loss is the amount of revenue lost due to unoccupied units.

Vacancy Rate

The vacancy rate is the rate of unoccupied units. The vacancy rate is calculated by dividing the total number of unoccupied units by the total number of units.

Voluntary Foreclosure

A voluntary foreclosure is a foreclosure proceeding that is initiated by a borrower who is unable to continue making loan payments on a property in an attempt to avoid further payments and prevent involuntary foreclosure and eviction.

W

Waiver

A waiver is the voluntary action of a person or party that removes that person's or party's right or particular ability in an agreement.

Warranty Deed

A warranty deed is one in which a property owner, when transferring the title, warrants that he or she owns the property free and clear of all liens. A warranty deed is used in most property sales. The warranty deed says that: The grantor is the rightful owner and has the right to transfer the title.

Warranty Of Title

A warranty of title is a guarantee by a seller to a buyer that the seller has the right to transfer ownership and no one else has rights to the property.

Workout Agreement

A workout agreement is a mutual agreement between a lender and borrower to renegotiate terms on a loan that is in default. Generally, the workout includes waiving any existing defaults and restructuring the loan’s terms and covenants.