Real Estate Investor Glossary

1031 Exchange

A tax deferred property exchange under Section 1031 of the Internal Revenue Code that defers capital gains and depreciation recapture when selling and reinvesting in like kind real estate.

Tax

After Repair Value (ARV)

The estimated market value of a property after all planned renovations are complete.

Brrr

Amortization

The process of paying down a loan over time through scheduled payments that split between principal and interest.

Loans

Bonus Depreciation

A tax provision that allows investors to immediately deduct a large percentage of certain property improvements in the first year rather than spreading the deduction over the asset's useful life.

Tax

BRRRR Method

Buy, Rehab, Rent, Refinance, Repeat: a strategy for recycling capital across multiple rental acquisitions.

Brrr

Capital Gains (Real Estate)

The profit from selling a property above its adjusted cost basis, taxed at either short term or long term capital gains rates depending on the holding period.

Tax

Capitalization Rate (Cap Rate)

NOI divided by property value, expressed as an annual percentage return on an unleveraged basis.

Financial Metrics

Cash on Cash Return

Annual pre-tax cash flow divided by the total cash you put into the deal.

Financial Metrics

Cash Out Refinance

Replacing an existing mortgage with a new larger mortgage and taking the difference as cash.

Loans

Closing Costs

The fees and expenses paid at the closing of a real estate transaction, separate from the down payment.

Loans

Cost Segregation Study

An engineering based analysis that reclassifies portions of a building into shorter depreciation lives (5, 7, or 15 years) to accelerate tax deductions.

Tax

Debt Service Coverage Ratio (DSCR)

NOI divided by annual debt service; how comfortably the property covers its loan payment.

Loans

Depreciation (Rental Property)

The annual tax deduction that allows rental property owners to write off the cost of the building over 27.5 years.

Tax

Depreciation Recapture

The tax the IRS collects when you sell a rental property, based on the depreciation deductions you previously claimed.

Tax

DSCR Loan

An investment property mortgage that qualifies borrowers based on the property's Debt Service Coverage Ratio rather than personal income.

Loans

Escrow (Mortgage)

An account held by the mortgage lender that collects monthly payments for property taxes and insurance and pays those bills on the borrower's behalf.

Loans

Eviction Process

The legal procedure for removing a tenant from a rental property, varying significantly by state and reason for eviction.

Legal

Fair Market Rent (FMR)

HUD published rent limits that set the maximum subsidy for Housing Choice Voucher units in each metro area.

Section 8

Fifty Percent Rule

A rough estimate that roughly 50% of gross rental income will be consumed by operating expenses, before debt service.

Financial Metrics

Forced Appreciation

Value increase created by renovations, repositioning, or operational improvements, as opposed to market appreciation.

Brrr

Gross Rent Multiplier (GRM)

A back of envelope valuation metric calculated as purchase price divided by annual gross rental income.

Financial Metrics

Housing Assistance Payment (HAP)

The portion of monthly rent paid by a Public Housing Authority directly to the landlord on behalf of a Section 8 tenant.

Section 8

Housing Choice Voucher (Section 8)

A federal housing assistance program that pays a portion of rent directly to participating landlords on behalf of qualifying low income tenants.

Section 8

Housing Quality Standards (HQS)

HUD mandated minimum health and safety requirements that Section 8 rental properties must meet to receive HAP payments.

Section 8

Internal Rate of Return (IRR)

The annualized rate of return on an investment over time, accounting for the timing of all cash flows and the final sale.

Financial Metrics

Landlord Insurance (DP-3)

A property insurance policy specifically designed for rental properties, covering dwelling, liability, and loss of rent, typically issued on a DP-3 form.

Insurance

Leasing Fee

A one time fee charged by a property manager when placing a new tenant, typically one half to one full month's rent.

Pm Ops

LLC for Real Estate

A Limited Liability Company used to hold rental property, providing personal asset protection and tax flexibility.

Entity Mgmt

Loan to Value Ratio (LTV)

The ratio of your outstanding mortgage balance to the current value of the property, expressed as a percentage.

Loans

Net Operating Income (NOI)

Annual rental income minus operating expenses, before debt service and taxes.

Financial Metrics

One Percent Rule

A quick screening rule stating that a rental property should generate monthly rent equal to at least 1% of its purchase price.

Financial Metrics

Operating Expense Ratio (OER)

The percentage of gross rental income consumed by operating expenses, before debt service.

Financial Metrics

Owner Distribution (PM Disbursement)

The monthly payment from a property manager to a rental property owner, representing collected rent minus management fees, maintenance, and other expenses.

Pm Ops

Passive Activity Loss (PAL)

A tax loss generated from a passive activity like rental real estate that can generally only offset passive income, with exceptions for real estate professionals and active participation under income limits.

Tax

Payment Standard

The maximum monthly rent a Public Housing Authority will subsidize for a Housing Choice Voucher unit, usually set as a percentage of Fair Market Rent.

Section 8

PITI

Principal, Interest, Taxes, and Insurance — the four components of a standard mortgage payment.

Loans

Private Mortgage Insurance (PMI)

An insurance premium charged by lenders on conventional mortgages when the borrower puts down less than 20%, protecting the lender from default.

Loans

Property Management Fee

The monthly fee charged by a property management company for managing a rental property, typically 6% to 12% of collected rent.

Pm Ops

Quitclaim Deed

A legal instrument that transfers whatever interest the grantor has in a property to the grantee, without any warranties about the title.

Entity Mgmt

Real Estate Professional Status (REPS)

A federal tax classification that exempts qualifying taxpayers from passive activity loss rules, allowing unlimited rental losses to offset W2 and business income.

Tax

Reasonable Accommodation (Section 8 / Fair Housing)

A change in rules, policies, or physical access that a landlord must provide to enable a tenant with a disability to enjoy equal use of a dwelling.

Section 8

Refinance Seasoning Period

The minimum time you must own a property before a lender will refinance based on its current appraised value instead of purchase price.

Brrr

Rent to Income Ratio

The ratio of a tenant's monthly rent obligation to their gross monthly income, used to screen tenant affordability.

Pm Ops

Return on Equity (RoE)

Annual return (cash flow plus appreciation plus principal paydown) divided by the total equity you have in a property.

Financial Metrics

Security Deposit

A refundable payment collected from a tenant at lease signing to cover potential damages, unpaid rent, or lease violations at move out.

Legal

Series LLC

A specialized LLC structure that allows a single parent LLC to contain multiple protected series, each with its own assets and liabilities, recognized in select states.

Entity Mgmt

Trust Account (PM)

A legally segregated bank account a property manager holds to store tenant rent and security deposits separately from the PM's own operating funds.

Pm Ops

Two Percent Rule

An aggressive version of the 1% rule requiring monthly rent equal to at least 2% of the purchase price.

Financial Metrics

Umbrella Policy

A liability insurance policy that provides additional coverage above the limits of an existing landlord or personal liability policy.

Insurance

Vacancy Rate

The percentage of time a rental property is unoccupied and not generating income.

Pm Ops