Top Real Estate Industry Terms
Welcome to Hezekiah's real estate glossary! Here, you'll find clear definitions for a wide range of real estate terms essential for building your investment portfolio. Whether you're familiar with concepts like Accessory Dwelling Unit or need to understand zoning regulations, our comprehensive glossary has you covered with definitions for common industry terms and complex real estate concepts.
By Rebekah Greene on 12/25/2024.
Reviewed by Hezekiah Randolph
A
Accessory Dwelling Unit (ADU)
An Accessory Dwelling Unit (ADU) is a secondary housing unit built on the same lot of land as the primary dwelling. ADUs can take various forms, such as a free-standing structure like a guest house, or an apartment built atop a garage. While ADUs have their own entrance, they often share the same address as the primary home.
Accredited Investor
An accredited investor is an individual who meets certain criteria for financial sophistication, typically based on income, assets, or experience, as outlined by SEC guidelines. This designation grants investors the ability to participate in investment opportunities that are not subject to direct oversight by the SEC. While the SEC regulates traditional investments such as stocks and bonds, private investments like real estate syndication fall outside its purview and require accredited investor status for participation.
Acquisition Cost
An acquisition cost, also known as the cost of acquisition, encompasses the total expenses associated with purchasing an investment property. This includes various fees such as mortgage loan fees, closing costs, inspection fees, and any other expenses incurred during the acquisition process.
Adjustable-Rate Mortgage (ARM)
An ARM, or Adjustable Rate Mortgage, is a type of home loan where the interest rate fluctuates periodically in response to changes in market conditions.
Affordable HousingAffordable housing refers to residential units specifically designed to be economically priced, typically targeted at low-to-moderate-income individuals or families. This affordability is often facilitated through government subsidies or specialized financing programs.
After Repair Value (ARV)
The projected value of a fixer-upper refers to the estimated worth of the property once all repairs, renovations, and reconstructions have been completed.
Agreement
In real estate, an agreement refers to a legally binding contract between two or more parties that outlines the terms and conditions of a transaction or arrangement.
Amortization
Amortization in real estate refers to the process of spreading the value of an asset over a period of time. In the context of mortgage loans, for example, amortization involves spreading the loan balance over the term of the loan, enabling the borrower to gradually pay down the loan balance over time.
Annual Depreciation Allowance
An annual depreciation allowance is a tax deduction that permits property owners to deduct a portion of the purchase price of an asset over its "useful life" from their income taxes. The "useful life" of the asset is typically determined by taxing authorities and specified in a depreciation schedule.
Annual Percentage Rate (APR)
Actually, APR stands for Annual Percentage Rate, and it represents the annualized cost of borrowing money or the annual rate of return on an investment, expressed as a percentage of the amount borrowed or invested.
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Annualized Returns
Annualized returns are investment yields that have been adjusted to reflect the return based on a 12-month period. This annual return is valuable for comparing investments because it provides investors with a standardized measure of performance over a one-year period, enabling them to assess how each investment performs relative to others.
Anticipated Hold Period
The anticipated hold period of an investment refers to the duration for which an investor plans to retain ownership of an asset before selling it.
A home appraisal is the process by which a qualified real estate appraiser assesses and determines the fair market value of a home. Lenders typically require this appraisal to ensure that the amount being borrowed is appropriate and fair in relation to the value of the property.
Appraisal Gap
The difference between the appraised value of a property and its accepted purchase price is known as the "appraisal gap." If the appraised value exceeds the accepted purchase price, it typically does not pose any issues. However, if the appraisal comes in lower than the accepted purchase price, the buyer may encounter challenges in securing financing. In such cases, the buyer may request a price reduction from the seller or opt to withdraw from the deal entirely. Alternatively, the buyer may choose to proceed with the transaction at the accepted purchase price and accept responsibility for covering the appraisal gap.
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Appraised Value
The current value of a property, as determined by a licensed appraiser, is known as the appraised value.
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Appreciation refers to the increase in the value of an asset over time. In real estate investing, the aim is for the property to appreciate in value, resulting in a favorable return on investment upon sale. Appreciation is influenced by various factors such as demand, supply, property improvements, interest rates, inflation, and the conditions of the local real estate market.
Assessed Value
The assessed value of a property is determined by the local Tax Assessor for the purpose of levying annual property taxes. Depending on the jurisdiction, the assessed value may represent either the estimated current market value of the property or a predetermined percentage of its market value. Certain taxing authorities impose caps on annual increases in assessed value; for instance, in Florida, assessed values cannot rise by more than 2% per year.
Assumable Mortgage
An assumable mortgage is a type of home loan that allows it to be transferred from the original borrower to another party. In some cases, a seller may opt to transfer their assumable mortgage to a buyer, enabling the buyer to benefit from the favorable terms of the original loan. This can be advantageous for the buyer, especially if the existing mortgage offers more favorable terms than what is currently available in the market.
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Basis Point
A basis point is a unit of measurement equivalent to one one-hundredth of a percentage point, often denoted as 0.01%. Basis points are frequently utilized in real estate, particularly in reference to mortgage interest rates, where even small changes can have significant financial implications.
Broker Price Opinion (BPO)
A broker price opinion (BPO) is an estimate of a property's value provided by a licensed real estate broker. BPOs are commonly used to determine the value of a property for various purposes such as refinancing, insurance purposes, or when listing the property for sale.
Broker Price Opinion (BPO) Merge
A broker price opinion (BPO) merge combines value assessments from various real estate brokers for a single property, creating a comprehensive valuation. In informal, internal contexts, BPO merges might serve as alternatives to formal appraisals for determining a property's fair market value.
BRRRR Method
The BRRRR Method is a targeted real estate investment strategy where the investor:
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Acquires a property,
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Renovates or rehabilitates the property,
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Leases the property to eligible tenants,
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Refinances the property based on its increased value after renovations and stabilization, and
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Reiterates the process, frequently leveraging cash from a cash-out refinance to fund subsequent purchases.
Building Classifications
Investment properties are categorized into four classifications: A, B, C, and D. These classifications help assess the overall condition of a property, its location quality, and available amenities. They serve as crucial indicators for investors to evaluate the value, risk, and potential profitability of a prospective purchase.
C
Cap rate, also known as capitalization rate, represents the ratio between a property's net operating income (NOI) and its purchase price, typically expressed as a percentage. To compute the cap rate, divide the NOI by the property's purchase price. For instance, if you acquire a property for $150,000 and anticipate an NOI of $12,000 in the initial year, the cap rate would be 8% ($12,000 divided by $150,000 equals 0.08).
Capital Expenditures
Capital expenditures, commonly referred to as CapEx, denote the financial resources allocated for acquiring, maintaining, or enhancing tangible assets. For instance, expenditures directed towards renovating an existing rental property qualify as capital expenditures.
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Capital Gains
Capital gains represent the profits realized from the sale of assets, calculated by subtracting the selling expenses from the proceeds of the sale.
Capital Gains Tax
Capital gains tax refers to the tax imposed by the federal and/or state government on the profits generated from investments. For instance, when selling an investment property, individuals are usually subject to taxation on the profits from the sale, adhering to federal and state income tax regulations. Capital gains are often taxed at a lower rate compared to ordinary earned income.
Capital Improvement
A capital improvement refers to a lasting structural modification, which can include restoration work, undertaken on a property to enhance its value.
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Cash Flow
Cash flow pertains to the movement of money into and out of a company, investment, or account. In real estate investing, cash flow typically denotes the recurring net income derived from property rentals.
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Cash-on-Cash Return
The cash-on-cash return represents the cash income generated on the cash invested in a property, presented as a percentage. It gauges the annual return an investor achieved relative to the amount of mortgage paid during the same year. To compute the cash-on-cash return, divide the annual pre-tax cash flow by the total cash invested.
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Cash Reserves
Cash reserves refer to funds that are set aside and kept readily available to address any unforeseen or emergency financial requirements.
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Class A Property
Class A properties represent the highest-quality category of real estate assets. Typically less than 15 years old, these properties are situated in prime locations, command high rental rates, and exhibit minimal or no deferred maintenance issues.
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Class B Property
Class B properties are generally older than Class A properties, although they are typically well maintained. However, they may exhibit some deferred maintenance issues and offer opportunities for value enhancement.
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Class C Property
Class C properties are typically over 20 years old and are characterized by significant deferred maintenance issues. Additionally, they are likely to be situated in less desirable locations compared to Class A and Class B properties.
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Class D Property
Class D properties are characterized by their age, poor condition, and extensive renovation needs. In some cases, they may require significant renovation or even complete teardown and reconstruction to become viable investment opportunities.
Clear Title
A clear title signifies that a property is free from any liens or encumbrances, and there are no disputes regarding its ownership.
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Closing Costs
Closing costs encompass the expenses associated with finalizing the sale or purchase of a property. When buying a property, closing costs may include expenses such as inspections, appraisals, loan fees, title search fees, document filing fees, and prorated property taxes and insurance. Conversely, when selling a property, closing costs may involve items like real estate agent fees and any outstanding property taxes or utilities.
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Commercial Real Estate
Commercial real estate commonly refers to properties utilized for business purposes, such as office buildings, shopping centers, restaurants, or hotels. Additionally, residential properties containing five or more units are also categorized as commercial properties within the real estate industry.
Comparables
Comparables, also known as comps, are properties that closely resemble a subject property in terms of size, location, age, and condition. They are commonly used to assess the current market value of a property. Analysts often calculate the sales price per square foot of recent comp sales to estimate the value of a given property.
Comparative Market Analysis (CMA)
A valuation process conducted to approximate the price of a home by considering recent sales of comparable properties in the nearby vicinity.
Compound Annual Growth Rate (CAGR)
The Compound Annual Growth Rate (CAGR) is the average annual rate of growth for a particular investment or portfolio over a defined period. It serves as a valuable metric for investments prone to fluctuation, as it indicates the average annualized growth.
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Compounded Interest
Compound interest refers to the phenomenon where interest is calculated not only on the initial principal amount but also on the accumulated interest from previous periods. In essence, it entails earning interest on the interest you have already earned.
Contingency
In real estate, a contingency refers to a condition outlined in a purchase agreement that must be met for the sale to proceed. For instance, a financing contingency stipulates that the buyer must secure a mortgage to finalize the deal. Typical contingencies include those related to appraisal, inspection, financing, title, and homeowner's insurance.
Conventional Mortgage
A conventional mortgage stands as one of the most prevalent types of home loans. Unlike some other mortgage options, conventional loans are versatile and can be utilized for various property types, including investment properties.
Core Real Estate Investments
Properties that require minimal upkeep and are situated in desirable locations, drawing in tenants with excellent credit histories. Discover more.
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Core+ Real Estate Investments
Moderately maintained properties situated in prime locations, appealing to tenants with good credit scores. Core+ investments present slightly elevated risks but offer greater potential rewards compared to Core Investments. Delve deeper into this concept.
Real estate crowdfunding involves multiple individuals collectively investing in a specific property, granting each investor a share percentage in the property. Typically facilitated through online platforms, investors are connected and contribute funds toward the property's acquisition or development. The crowdfunding platform oversees the project until its completion and distributes profits from the property to the participating investors.
D
Debt
A debt denotes a sum of money that must be repaid to settle a loan.
Debt Fund
A debt fund is an investment vehicle primarily dedicated to debt-based securities. Investors in a debt fund provide funds to borrowers, receiving a fixed interest rate on the loan in return.
Debt Investing
Debt investing refers to the broad category of investments in debt-based assets. Examples include hard money loans, bonds, and peer-to-peer lending.
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Debt-to-Equity Ratio
The debt-to-equity ratio gauges the proportion of financing compared to ownership within an asset.
Debt-to-Income Ratio (DTI)
The Debt-to-Income (DTI) ratio assesses the percentage of a household's monthly income dedicated to servicing its monthly debt obligations.
Depreciation
Depreciation refers to a tax deduction available to owners of income-generating properties, calculated based on the gradual decline in value of the property's structure over its useful lifespan.
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Development
A development typically refers to a fully constructed real estate structure. While commonly associated with commercial properties or multi-family residential buildings, it can also encompass single-family homes, especially those of significant value.
Digital Real Estate
Digital real estate encompasses online assets like domain names, websites, or digital businesses, which can be traded or leased. More recently, it's associated with "virtual real estate," denoting digital land and structures within virtual reality "Metaverses."
Diligence
In real estate, diligence commonly refers to the comprehensive research and analysis conducted before finalizing the purchase of a property. This process, also known as "due diligence," often includes activities such as property inspections, appraisals, and land surveys.
Discount Rate
The discount rate is a metric employed to approximate the present value of an income-producing property, considering future cash flows derived from rental income. For further details on how the discount rate is utilized, refer to "Discounted Cash Flow Analysis."
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Discounted Cash Flow (DCF) Analysis
A Discounted Cash Flow (DCF) analysis is a mathematical framework employed to evaluate the potential profitability of an investment project by assessing the present value of future cash flows. The analysis takes into account the impact of time on the value of money due to factors like inflation and deflation. At Hezekiah, our experts utilize DCF analysis to calculate the present-day worth of future rental income, aiding in the assessment of the viability of long-term real estate investments.
Distributions
In the realm of real estate investments, distributions refer to the regular payments disbursed to investors from the income generated by a property or portfolio. These payments may take the form of dividends, interest, or rental income.
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Diversification
The process of allocating capital across various investments to minimize the overall risk of a portfolio is known as diversification.
Dividend
A dividend is a recurring payment distributed to shareholders, usually sourced from a company's profits generated within a specific period. However, dividends can also be disbursed from a company's reserve funds.
Dividend Yield
A dividend yield serves as a performance metric to assess the return generated by a dividend-producing stock. It is calculated by dividing the dividend per share by the price paid per share.
Dollar Cost Averaging
Dollar cost averaging is an investment strategy where a fixed dollar amount is regularly invested into a particular investment, regardless of fluctuations in its price.
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Down Payment
A down payment refers to the initial payment made upfront towards the purchase price of a piece of real estate.
Downside Protection
Downside protection is indeed a risk management strategy aimed at mitigating potential losses from a real estate investment. It involves implementing measures such as thorough due diligence, diversification, conservative financing, and appropriate insurance coverage to safeguard against adverse market conditions or unforeseen events.
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Due Diligence
Due diligence involves the comprehensive investigation and analysis that a prudent individual is expected to undertake before making significant decisions, such as buying a property or entering into a contract. This process typically includes examining various aspects such as financial records, legal documents, property condition, and market trends to ensure informed decision-making and mitigate risks.
E
Earnest Money
Earnest money is indeed the sum of money a property buyer offers upfront as a deposit to secure the property during the contract period. This deposit serves as an indication to the seller of the buyer's genuine intention to purchase the property. Whether earnest money is refundable or not depends on the terms outlined in the contract.
Effective Gross Income
Effective Gross Income (EGI) represents the total income generated by a property after subtracting vacancy losses and losses due to unpaid rents. EGI is also known as property revenue.
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Entitlement
Entitlements refer to the necessary governmental approvals and permissions required to initiate and complete the development of commercial real estate projects.
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Equity
Equity represents the value of an asset, such as a real estate investment, after deducting the amount owed in financing, such as a mortgage.
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Equity Multiple
An equity multiple quantifies the rate of return on an investment by assessing the distributions received. To compute the equity multiple, divide the total distributions received by the total capital invested.
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Escrow
Escrow entails a third party holding funds on behalf of two parties involved in a transaction. In real estate, escrow is initiated with an escrow company once a property is under contract. The escrow company safeguards the funds on behalf of the buyer and seller until the transaction concludes. Upon completion, the escrow company disburses the funds to the relevant parties, thereby concluding the escrow process.
Escrow Agent
An escrow agent serves as a neutral third-party intermediary responsible for holding funds in an escrow account during a transaction between a buyer and seller. In real estate transactions, for instance, buyers typically deposit an "earnest money deposit" with an agreed-upon escrow agent upon signing a purchase agreement with the sellers. The escrow agent securely holds these funds and disburses them to the designated party, following the terms outlined in the purchase agreement.
Estimated Total Cash Return
Estimated total cash return is a performance metric that assesses the total anticipated cash generated from an investment property over a defined period, subtracting all property-related expenses. This calculation encompasses various potential value-additions, including rental income, tax benefits, and potential appreciation.
Estimated Total Gain
Estimated total gain represents the anticipated profit or increase in value that an investor foresees from an investment property. This calculation considers factors such as purchase price, estimated sales price, income generated, and expenses incurred.
Equity
In investment terms, equity refers to the value of an investor's ownership stake in an asset.
Equity Fund
An equity fund is a collective investment scheme where investors acquire ownership stakes in assets. Real estate syndication exemplifies an equity fund, where investors combine their capital to jointly own and participate in a real estate project or development.
Equity Investing
It seems like there's a mix-up in the terminology. Equity investing actually refers to investments where the investor shares in the ownership of assets. Examples of equity investing include buying stocks, real estate, or owning a portion of a business. On the other hand, debt investing involves loaning money to an entity, such as buying bonds or lending money through peer-to-peer lending platforms.
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Fair Housing Act
The Fair Housing Act is a law that forbids housing discrimination against protected classes, including race, nationality, color, religion, sex, familial status, or disability.
Fair Market Value (FMV)
Fair Market Value is the price a property would fetch on the open market at a particular moment. It represents the amount a reasonable buyer would be willing to pay and a reasonable seller would agree to accept if neither were under pressure to buy or sell, and there were no obligations between them.
FHA Financing
FHA financing pertains to FHA mortgage loans, which are home loans supported by the US Federal Housing Administration. These loans are commonly sought by first-time buyers due to their ability to offer down payment options as low as 3.5% and slightly more lenient credit score requirements compared to conventional loans.
For Rent by Owner (FRBO)
For Rent By Owner (FRBO) describes rental properties that are leased directly by the property owner, bypassing the involvement of a real estate agent or property manager.
For Sale by Owner (FSBO)
FSBO properties are listed for sale directly by the property owner, without the engagement of a real estate agent or broker.
Fractional Ownership
Fractional ownership occurs when multiple investors pool their funds to acquire a high-value asset, such as a property. This arrangement can involve purely financial ownership, where each investor receives a portion of the rental income. Alternatively, it can involve useful ownership, where each investor has access to their share of the property, such as in a multi-family deal where each investor has access to a designated unit. Fractional ownership can also combine both financial and useful ownership elements.
Financing
Financing refers to the provision of funds or capital to acquire assets, undertake projects, or conduct business activities. It involves obtaining money from various sources, such as loans, lines of credit, or investments, to meet financial needs and support operations.
Fixed-Rate Mortgage
A fixed-rate mortgage is a type of home loan where the interest rate remains constant or "fixed" for the duration of the loan term.
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Flipping
Flipping entails the real estate investment approach of buying a property, swiftly renovating it, and promptly reselling it for profit.
A fund of funds refers to a scenario where one investment fund, which pools money from multiple investors to purchase assets, invests in another fund.
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General Partner
A general partner is a person or entity tasked with making decisions regarding the management of a collective asset.
Gross Operating Income (GOI)
Gross operating income (GOI) represents the entirety of revenue generated by an investment property, encompassing rental income as well as supplementary sources like parking fees or laundry proceeds, prior to subtracting operating expenses such as maintenance, property taxes, insurance, and vacancy losses.
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Gross Profit
Gross profit refers to the total revenue earned from selling an asset subtracted by the cost incurred in purchasing the asset.
Gross Rental Yield (GRY)
Gross rental yield (GRY) quantifies the returns from a rental property by dividing the property's annual rental income by its purchase price or current market value.
Gross Scheduled Income (GSI)
Gross scheduled income (GSI) represents the maximum potential rental income a property could generate if it were fully occupied and operating at maximum capacity.
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Gross Yield
The gross yield of an investment refers to the total earnings before taxes and expenses are subtracted. It is typically expressed as a percentage of the investment amount. To calculate gross yield, divide the annual return on your investment (before taxes and expenses) by the current price of the investment.
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Growth Rate
The growth rate signifies the anticipated rate at which an asset is expected to appreciate in value. In real estate, this can encompass annual rent escalations or property appreciation over time.
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HOA Fees
HOA (Homeowner’s Association) fees are dues paid by property owners within a specific subdivision, condominium complex, or planned community. These fees typically fund the maintenance of shared amenities, common areas, private roadways, and the exteriors of communal structures.
Hold Period
The hold period of an investment is the duration during which an investor retains ownership of an asset before deciding to sell it.
Homeowners Association (HOA)
A homeowners association (HOA) is a group comprised of local property owners within a specific area. Membership in these organizations is typically mandatory for all property owners within the HOA's jurisdiction, and they collect dues from members to ensure the maintenance and upkeep of the area.
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Home Equity Line of Credit (HELOC)
A Home Equity Line of Credit (HELOC) is a financial tool utilized by property owners to tap into the equity they possess in their property and convert it into cash. HELOCs function akin to credit cards, offering borrowers a revolving line of credit they can access as necessary. However, unlike credit cards, HELOCs are secured by real estate, allowing borrowers to secure lower interest rates. Nonetheless, failure to repay HELOC debt can result in the risk of foreclosure.
Home Inspection
A home inspection is indeed a thorough assessment conducted by a professional to evaluate the physical condition of a property. This examination typically covers various aspects of the property, including its structural integrity, electrical systems, plumbing, heating and cooling systems, and overall safety. The findings of a home inspection can provide valuable insights for potential buyers or sellers regarding the condition of the property and any necessary repairs or maintenance.
Hotel
A hotel is a type of commercial establishment that offers short-term lodging and accommodation services to guests.
House hacking involves a property owner finding ways to generate income from their residence. For instance, one method of house hacking is constructing an accessory dwelling unit (ADU) on the property, which can be rented out for additional income.
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Income
In real estate, income refers to the total amount of money generated from a property, usually derived from rents collected for the units. However, it can also encompass other revenue sources such as parking fees or income from laundry facilities.
Income-Producing Assets
Income-producing assets are assets that generate cash flow or income. For instance, rental properties are considered income-producing assets because they generate rental income.
Income Property
An income property encompasses any real estate asset that generates cash flow. This could include various types of properties such as residential apartment buildings, retail spaces, or single-family homes that are rented out to tenants.
Industrial Investing Entity
An industrial investing entity is a company or organization that specializes in investing in industrial real estate properties. This investment category typically includes assets like warehouses, distribution centers, manufacturing plants, and other facilities used for industrial activities.
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Inflation
Inflation refers to the general increase in prices of goods and services over time, leading to a decrease in the purchasing power of money.
Initial Investment
The initial investment refers to the upfront cash outlay required to acquire an asset. For individual real estate investors, this typically includes the property's down payment, closing costs, and any renovation expenses.
Inspection Contingency
An inspection contingency is a provision in a home purchase contract that specifies the requirement for a satisfactory home inspection. With this contingency, buyers have the option to withdraw from the deal within a specified timeframe without facing penalties if issues are identified in the inspection report that they are not comfortable with.
Inspection Report
An inspection report is a formal document that provides a comprehensive assessment of the condition of a property, typically conducted by a licensed inspector. This report details any observed issues, defects, or areas of concern found during the inspection process.
Interest Rate
The interest rate represents the expense associated with borrowing money, typically expressed as a percentage of the loan amount.
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Internal Rate of Return (IRR)
The Internal Rate of Return (IRR) is indeed a metric utilized to assess the potential profitability of investments. It employs a discounted cash flow analysis, where the net present value (NPV) of all cash flows is equated to zero. However, it's worth noting that this method disregards external factors such as inflation and the cost of capital.
Investment Property
An investment property is any real estate asset acquired with the primary aim of generating returns. These returns typically include recurring rental income, as well as potential profits from the future sale of the property.
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Investment Waterfall (Distribution Waterfall)
The investment waterfall, also known as a distribution waterfall, is a mechanism for allocating profits or losses to investors in a manner that allocates the risks primarily to the investment sponsor. This structure can take various forms and is typically delineated in detail within the terms of the investment agreement.
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Landlord Insurance
Landlord insurance is a type of property insurance tailored to safeguard rental property structures from damages caused by occurrences like fire, adverse weather conditions, or vandalism. Furthermore, it often encompasses liability coverage for injuries sustained on the rental property premises.
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Lease
In real estate, a lease is a legal document that grants the right of occupancy to a party other than the property owner for a defined duration, typically in exchange for a predetermined rental fee.
Leverage
Leverage refers to the utilization of borrowed funds, typically in the form of debt, to amplify the potential return on an investment.
Leveraged Return
Leveraged return represents the return on investment (ROI) achieved through the use of borrowed funds to finance an investment. By employing borrowed capital, investors have the potential to amplify their returns, provided that the investment's ROI surpasses the interest rate of the loan.
Limited Partner
A limited partner is an individual or entity that invests in a partnership but assumes limited liability and responsibilities. Typically, limited partners are not involved in the daily management of the business or investment.
Liquidity
Liquidity refers to the ease with which an asset can be converted into cash without significantly affecting its market price. Intangible investments such as mutual funds, stocks, and bonds are generally considered highly liquid because they can be easily bought or sold on the market. In contrast, tangible assets like real estate and collectibles tend to be less liquid because they may require more time and effort to sell and may not have as active a market.
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LLC
In real estate, an LLC (Limited Liability Company) is a legal structure that enables investors to purchase and possess real estate. Instead of holding the real estate in an individual's name, ownership is vested in the LLC, thereby mitigating the liability of the owner(s).
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Loan-to-Cost (LTC) Ratio
The loan-to-cost ratio assesses the cost of financing a new real estate development relative to the total cost of constructing the project. This ratio is utilized to evaluate the risk associated with extending a construction loan to a real estate developer. It is calculated by dividing the loan amount by the estimated total construction cost.
Loan Origination Fee
A loan origination fee is indeed a charge imposed by lenders to compensate for the administrative expenses involved in processing a loan application and disbursing the funds. These fees are generally calculated as a percentage of the loan amount and are paid by the borrower during the closing process.
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Loan-to-Value (LTV) Ratio
The loan-to-value (LTV) ratio indicates the portion of a property's value that is financed as a percentage of its current value. It serves to gauge the equity in a property, essential for mortgage refinancing. LTV is calculated by dividing the loan balance by the current fair market value of the property.
Long-Term Rental
A long-term rental refers to any property or unit within a property that is leased out via a rental contract for an extended period. While there's no fixed duration that defines "long-term," leases typically spanning 12 months or more are often considered as such by many investors.
LTV (Loan-to-Value)
The loan-to-value (LTV) ratio is a financial metric that illustrates the portion of a property's value that is covered by a mortgage loan.
M
Management Fee
A management fee refers to the sum charged by a company for overseeing the day-to-day operations of an asset. For instance, property managers often levy a percentage of the rental income in return for services such as tenant screening, rent collection, and handling maintenance issues.
Market Value
Market value is indeed the price that an asset would likely fetch on the open market. It represents the amount that a sensible buyer would be willing to pay and that a rational seller would agree to accept for the asset.
Mixed-Use Building
A mixed-use building encompasses various property types within a single structure. For instance, a typical example features an apartment building with retail storefronts on its ground floor.
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Mortgage
A mortgage is a form of loan utilized for acquiring real estate. In this arrangement, the borrower commits to repaying the lender over a specified period, and the property itself acts as collateral to guarantee the loan.
Mortgage Insurance Premium (MIP)
A MIP, or Mortgage Insurance Premium, represents the expense associated with maintaining a mortgage insurance policy. Mortgage insurance serves to safeguard the lender in case the borrower defaults on the loan. It's commonly mandated by lenders for borrowers who make a down payment of less than 20% on a property.
Mortgage Loan
A mortgage loan is a financial arrangement utilized to fund the acquisition of a property. Typically, mortgage loans are "secured" by the property, implying that the property serves as collateral for the loan. This setup allows the lender to initiate foreclosure proceedings on the property if the borrower defaults on the loan repayments.
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Multi-Family Home
A multi-family residence consists of a single building with multiple separate units, accommodating several families. Each unit has its unique address. Residential multi-family homes typically contain two to four units, while commercial multi-family properties contain five or more units.
N
Net Cash Flow
Net cash flow represents the recurring income generated by an asset after deducting expenses. For instance, if a rental property generates $4,000 per month in rental income and incurs $2,500 in monthly expenses, the net cash flow would amount to $1,500 per month.
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Net Profit
The net profit denotes the earnings remaining after deducting all expenses from the total revenue of an investment. This figure is derived by subtracting all investment-related expenses from the investment's total revenue.
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Net Operating Income (NOI)
Net Operating Income (NOI) represents the annual income generated by an investment property after subtracting its operating expenses. It's calculated by deducting operating expenses from the property's income.
Net Yield
Net yield refers to the true return on investment achieved after accounting for all associated expenses and costs.
Non-Recourse LoanA non-recourse loan is indeed a loan secured by an asset, which serves as collateral in the event of default. In such loans, the lender is restricted from pursuing further compensation beyond the collateral. For instance, mortgages often operate as non-recourse loans, with the home serving as collateral. If the borrower defaults, the lender can foreclose on the property but cannot seek additional damages from the borrower.
O
Office
An office serves as commercial real estate intended for business operations and administrative tasks.
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Operating Expenses
Operating expenses in real estate encompass the various costs involved in operating a property. These expenses typically include items such as insurance, utilities, property taxes, property management fees, repairs, and maintenance.
Opportunistic Real Estate Investments
Heavily financed new development projects, constructed from the ground up, are categorized as opportunistic investments. These investments are riskier compared to Core, Core+, and Value-Add Investments, but they offer the potential for higher returns.
Opportunity Zone
An opportunity zone refers to a specified geographic area identified by the US government as requiring economic revitalization. These zones aim to encourage investors to bolster struggling communities and generate employment opportunities to enhance the local economy's stability. Investing in opportunity zones offers tax incentives as part of the initiative.
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Ordinary Income
Ordinary income is a tax-related term used to categorize any income subject to standard tax rates, distinct from income taxed at special rates such as long-term capital gains. Examples of ordinary income include wages, salaries, commissions, rental income, tips, bonuses, and interest.
Oversubscription
Oversubscription occurs when the demand for an investment opportunity, such as a real estate fund, surpasses the available supply of shares or allocations.
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Pari Passu
Pari passu is indeed a Latin term signifying "equal footing." In the realm of real estate, it denotes the equal ranking of multiple loans on a property, ensuring that each loan holds the same level of priority in repayment.
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Passive Income
Passive income refers to earnings obtained without the need to exchange time or labor for compensation. In real estate, rental income is regarded as passive income since the rents received do not necessitate a specific amount of time or effort spent on property management. Interest income is another prevalent form of passive income in real estate. Additionally, through a real estate syndicate like Hezekiah, all investment income may be considered passive because Hezekiah manages all renovation, development, and management tasks on behalf of investors.
Pass-Through Taxation
Pass-through taxation refers to a tax arrangement where a business entity itself does not incur taxes. Instead, the income generated by the business "passes through" to the owners, who then report the income on their personal income tax returns.
Points
In real estate financing, points are initial fees that a buyer can opt to pay the lender in exchange for a lower interest rate on a mortgage loan. Although the specifics may vary, typically, one point equals 1% of the loan amount and lowers the interest rate by approximately a quarter of a percent.
Portfolio
In investment terminology, a portfolio encompasses the entirety of an investor's holdings. A well-structured portfolio typically includes investments from various asset classes, such as stocks, bonds, and real estate.
Pre-Approval
Pre-approval is the process by which a home buyer has a lender assess their financial situation to verify their eligibility for a mortgage loan. During this process, the lender also determines the maximum amount the buyer is qualified to borrow.
Preferred Return
A preferred return denotes the predetermined rate of return that preferred investors receive before other investors are entitled to any profits. For instance, in a real estate deal with a preferred return of 12% for preferred investors, these investors would receive their 12% return before the remaining profits are distributed among other investors.
Pre-Qualification
Pre-qualification involves a mortgage lender asking a potential homebuyer basic financial questions to gauge the likelihood of their eligibility for a home loan. This differs from pre-approval, where the lender thoroughly reviews the buyer's income, financial statements, and credit to confirm eligibility for a loan and determine the borrowing amount.
Principal
In the realm of real estate finance, the principal denotes the initial sum borrowed in a loan, exclusive of any interest charges or additional fees.
Principal Reduction
Principle reduction pertains to the diminishing loan balance over time as borrowers make payments.
Private Mortgage Insurance (PMI)
PMI, or Private Mortgage Insurance, functions as an insurance policy safeguarding mortgage lenders in case borrowers default. It's often mandated by lenders for borrowers who put down less than 20% on a property.
Pro Forma
"Pro forma" is Latin, translating to "as a matter of form." In real estate, it's frequently used to describe a document where investors outline projected income and expenses for an investment property.
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Profit
Profit in real estate investment is calculated as the property's sales price minus all expenses related to its acquisition, ownership, and sale.
Projected Annual Appreciation
Projected annual appreciation refers to the anticipated rise in the value of a property over a designated period, usually expressed as a yearly percentage.
Property Insurance
Property insurance serves as the overarching term for an insurance policy designed to shield property owners from potential damage or destruction caused by various factors such as fire or weather. Homeowner’s insurance and landlord insurance are specific types of property insurance.
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Property Manager
A property manager is an individual or entity tasked with managing the daily operations of an income-generating property. Their duties usually encompass tasks such as tenant screening, rent collection, property maintenance, lease drafting, and lease renewal negotiations.
Property Management
Property management involves the ongoing supervision of income-generating real estate, which can encompass various types such as single-family rental properties or multi-family apartment buildings. This oversight includes activities such as marketing the property for rent, screening tenants, drafting leases, rent collection, maintenance management, lease renewal negotiations, addressing tenant concerns, and managing move-ins and move-outs.
Property Taxes
Local taxes imposed on property owners are usually calculated as a percentage of the property's value. These taxes fund various local services, such as schools, infrastructure maintenance, police departments, and fire departments.
Prorated
Prorating involves distributing an expense or return proportionally over a suitable period of time. For instance, if you join a 12-month investment in its second month, your returns would be prorated to reflect the 10 months during which you were an active investor in the project.
Purchase AgreementA purchase agreement is a contractual document outlining the anticipated transfer of a property. In this agreement, both the buyer and seller stipulate their intentions regarding the property transfer, which typically include details such as the price, terms of the sale, and any contingencies that must be met for the transaction to proceed.
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Ready-to-Issue (RTI) Permit
RTIs, or Residential Tenant Improvement permits, are the necessary permits required for constructing residential real estate projects in Charlotte County.
Real Estate Agent
A real estate agent is a licensed professional in the field of real estate, authorized by the state to represent both buyers and sellers in real estate transactions.
Real Estate Fund
A real estate fund is a specialized form of mutual fund that primarily invests in securities related to real estate, such as Real Estate Investment Trusts (REITs).
Real Estate Investment Trust (REIT)
A company that invests in income-producing properties and distributes a portion of the profits to investors in the form of dividends is typically referred to as a Real Estate Investment Trust (REIT).
Real Estate Owned (REO)
REO stands for Real Estate Owned, referring to properties that have been acquired by a lender through foreclosure. This term originates from the accounting designation used to categorize these assets on the lender's balance sheet.
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Real estate syndication, akin to crowdfunding, involves multiple individuals pooling their resources to invest in a property collectively. This collaborative approach enables access to higher-value projects that might be beyond individual reach. In a real estate syndication, a syndicator or sponsor leads the process of finding, purchasing, managing, and selling the property, allowing investors to benefit from ownership without directly handling investment tasks. Unlike traditional crowdfunding, investors in a syndication project hold a stake in the actual real estate asset itself.
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Refinancing
Refinancing involves replacing an existing mortgage with a new one that offers more favorable terms. This strategy is commonly employed to secure a lower interest rate or to convert a property's equity into cash through a cash-out refinance.
Regulation D
Regulation D provides exemptions from certain Securities and Exchange Commission (SEC) regulations for companies seeking to raise private capital through the offering of private securities, such as equity shares.
Rehabilitation
In real estate, rehabilitation refers to the comprehensive renovation of a property that requires repairs and updating.
Remote Investing
Remote investing in real estate occurs when an investor ventures beyond their local market to invest in properties. This can involve building a national or global portfolio or purchasing rental properties in out-of-state locations.
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Rent Increase
A rent increase refers to a rise in the rental rates of a property compared to previous periods, whether monthly or yearly. Rent increases can be specified as a dollar amount (e.g., $200 per month) or as a percentage (e.g., 5%).
Rent To Own
In real estate, rent to own is a contractual arrangement where an individual leases a property with the option to buy it in the future. A rent-to-own agreement is established between the property owner and the renter/buyer, offering a pathway to property ownership for those who may not have immediate financial means to purchase the property outright.
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Rental Income
Rental income is the revenue received by landlords or real estate investors from tenants in exchange for their use of the property.
Repair and Maintenance Expense
Repair and maintenance expense encompasses the continuous expenditure associated with repairing and maintaining a rental property to ensure its proper functioning. Property owners are advised to have a reserve fund set aside to cover these costs, which may include tasks ranging from routine landscaping to occasional roof replacement.
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Residential Real Estate
Residential real estate comprises properties zoned for single-family homes or multi-family homes with up to four units. Multi-family properties with five or more units are categorized as commercial real estate rather than residential real estate.
Retail
Retail spaces are commercial properties designated for the sale of goods and services directly to consumers.
Retail Investors
A retail investor is an individual who engages in buying and selling assets through a brokerage, typically without professional expertise. While the term is commonly used in relation to securities investments such as stocks and bonds, it can also apply to real estate investors who invest in real estate securities like REITs and ETFs, which are traded on exchanges like stocks.
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Return on Investment (ROI)
Return on Investment (ROI) quantifies your profit as a percentage of the initial investment. To calculate ROI, divide the net profit by the total investment amount.
Return
Return, often referred to as profit, is the difference between revenue and expenses. In real estate investment, profit is calculated as the property's sales price minus all expenses related to acquiring, holding, and selling the property.
Reverse Mortgage
A reverse mortgage is a financial arrangement where a homeowner, typically aged 62 or older and having paid off their original mortgage, borrows a portion of their home's equity from the lender each month. The total loan amount, plus accrued interest, becomes due when the owner sells the house, permanently vacates the property, or passes away.
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ROI Calculator
An ROI calculator is a tool utilized to compute estimated or actual returns on an investment.
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SEC Rule 506c
SEC Rule 506(c) permits organizations to publicly solicit investments not subject to SEC regulation provided certain conditions are met. These conditions include making reasonable attempts to verify that all investors are accredited.
Section 8
Section 8 refers to a provision within the Housing Act of 1937, which focuses on providing rent assistance to low-income households. The Section 8 assistance program entails government-funded vouchers, disbursed on behalf of eligible renters to landlords as payment for rent.
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Securities and Exchange Commission (SEC)
The SEC, or Securities and Exchange Commission, is a U.S. government agency established to safeguard investors by overseeing and regulating various investment types, including stocks, bonds, and mutual funds.
Security Deposit
A security deposit is a predetermined sum of money paid by a tenant to a landlord prior to moving in. It functions as a form of financial security for the landlord in the event that the tenant causes damage to the property or violates the terms of the lease agreement.
Self-Directed Individual Retirement Account (SDIRA)
An SDIRA, or Self-Directed Individual Retirement Account, is a specialized type of IRA where the account holder has full control over their investment choices. Unlike traditional IRAs, which typically limit investments to publicly-traded securities, SDIRA holders can allocate their retirement funds into alternative investments such as real estate, precious metals, and tax liens.
Self-Directed IRA
A self-directed Individual Retirement Account (IRA) is a tax-advantaged account that offers the account holder greater autonomy over their investment choices. Unlike traditional IRAs, which are typically limited to conventional securities such as stocks and bonds, self-directed IRAs allow for a broader range of investments, including alternative assets like real estate.
Self-Storage
Self-storage properties are facilities that offer rental storage space to individuals or businesses for storing their belongings or goods.
Seller Concessions
Seller concessions are incentives provided by sellers to enhance the attractiveness of their listings to potential buyers. These concessions often involve financial arrangements, such as covering a portion of the buyer's closing costs or reducing the sale price to accommodate home repairs. Additionally, concessions can extend to terms, such as agreeing to a swift closing for a cash buyer.
Senior Housing
Senior housing consists of residential communities designed to cater to the needs of older adults. Some of these facilities offer assisted living services, such as on-site meals and medical care.
Series LLC
A Series LLC is a legal framework permitting the establishment of multiple individual LLCs interconnected with one another. For instance, a real estate investment firm might utilize a series LLC, where each property possesses its own LLC ownership entity.
Short Sale
A short sale occurs when a property owner sells their property for less than the outstanding amount owed on the mortgage. This situation often arises during periods of significant and abrupt declines in property values. While it may be advantageous for the owner to wait for market conditions to improve, if they are unable to make mortgage payments, a short sale is preferable to foreclosure. Notably, the lender must approve the short sale before the transaction can proceed.
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Single Family Home
A single-family home is a dwelling designed for occupancy by a single household, with living spaces tailored to accommodate the needs of that household alone. Each single-family home typically has its own unique address.
Single Family Rental
A single-family rental is a property designated for occupancy by a single household and rented out to tenants.
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Sponsor
A sponsor is an individual or entity tasked with overseeing a real estate syndicate. This involves purchasing real estate on behalf of investors, managing renovation or development projects, overseeing ongoing property management, facilitating property sales when necessary, and appropriately disbursing funds to investors.
Squatter
A squatter is an individual who occupies a property without authorization from the owner or lawful tenant.
Squatters' Rights
Squatters' rights, also referred to as adverse possession laws, are legal provisions that grant rights to individuals who occupy another person's property without permission or legal title for a prolonged duration. These laws vary by state and may afford certain protections for long-term residents, potentially allowing them to remain on the property or assert ownership claims over time.
Subsequent Months
Subsequent months refer to the months that follow a particular event or period. For instance, in a rental agreement, there might be a discounted rental rate for the first month, with the regular full rental price applying for subsequent months thereafter.
Systematic Risk
Systematic risk, also known as market risk, is the inherent risk that affects the entire market or a specific segment of it, impacting the overall performance of investments within that market or segment.
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Tenant Screening
Tenant screening is the practice of evaluating rental applications and conducting further due diligence, such as credit checks, background checks, or reference checks, to identify highly qualified tenants for a rental property.
Term
In real estate, a term typically denotes a specified period of time outlined in a contract. For instance, conventional mortgages may have a 15 or 30-year term, while real estate investments might be structured with a five-year term.
1031 Exchange
Tax deferral is where taxes on investment profits are postponed by reinvesting those profits into a new investment project. This strategy allows investors to defer capital gains taxes until a later date, typically when the new investment is sold.
Title Insurance
Title insurance is indeed a policy that provides protection to both buyers and sellers against unforeseen ownership claims made on a property by third parties. It safeguards against any defects or issues with the property's title that may arise after the transaction is completed.
Title Report
A title report is a written document that details the known history of ownership of a property, including any claims against the property by third parties that have been identified by a title company.
Total Return
The total return of an investment encompasses both the asset's appreciation since the previous return period and the cash flows it has generated during the period.
Turn-Key Property
A turn-key property is one that is fully prepared to accommodate occupants without the need for any renovations or modifications prior to move-in.
2% Rule
The 2% rule is a guideline utilized to evaluate the potential profitability of a rental property investment concerning cash flow. Under this rule, the monthly rental income should be a minimum of 2% of the property's purchase price.
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Underwriting
Underwriting is the process of assessing the financial risk involved in lending funds to a borrower. This analysis involves evaluating the borrower's creditworthiness, financial stability, and ability to repay the loan.
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Vacancy Provision
Vacancy provisions refer to reserve funds set aside by property owners to accommodate inevitable periods during which a unit will be unoccupied. These vacancies occur when a resident moves out and the unit requires preparation for the next tenant or when a unit is temporarily withdrawn from the market for renovation. The vacancy provision is intended to cover the loss of rental income during these unoccupied periods.
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Vacancy Rate
A vacancy rate is a measure of the proportion of unoccupied units in a rental property, typically expressed as a percentage. In the case of multi-family properties, the vacancy rate indicates the percentage of units without a paying tenant. For example, in a 10-unit structure with 9 occupied units, the vacancy rate would be 10% since one unit is unoccupied.
Additionally, vacancy rates can be calculated based on the amount of time a property remains unoccupied. To compute the vacancy rate in terms of time, divide the number of days the property is vacant by the total number of days in the specified period (e.g., a month, quarter, year, or the total time the property was held).
Vacation Rental
A vacation rental is a property leased on a short-term basis, usually to vacationers. Such rentals tend to experience higher vacancy rates compared to long-term rentals but can also yield higher nightly rental rates.
Valuation
Valuation is the process of determining the current value of a property. Valuations commonly rely on one of three methods: comparable sales, income generated, or replacement cost. A formal valuation performed by a licensed professional is known as an appraisal.
Value-Add Real Estate Investments
Value-Add Investments are properties located in developing neighborhoods with significant transformation potential. They represent a slightly higher level of risk compared to Core and Core+ Investments but offer the opportunity for higher returns.
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Wholesaling
Wholesaling is a real estate investment tactic where an investor secures a property under contract and subsequently sells the purchase contract to another buyer. The profit in wholesaling is derived from the difference between the price agreed upon by the investor and the amount paid by the eventual buyer.
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Yield
A yield refers to the earnings or profit generated by an investment, commonly represented as a percentage of the property's value or the initial investment amount.
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Zoning
Zoning regulations determine the allowable type of construction on a specific parcel of land. For instance, land zoned for single-family homes would not permit the construction of a large apartment complex.