Glossary

Real estate investing terms, in plain English

Every term comes with its formula and a worked example.

1% rule: The 1% rule is a quick rental screen: monthly rent should be at least 1% of the purchase price for a property to deserve a closer look.
50% rule: The 50% rule estimates that about half of a rental's rent goes to operating expenses, not counting the mortgage payment.
70% rule: The 70% rule says a house flipper should pay no more than 70% of the after-repair value minus the cost of repairs.
After-repair value (ARV): After-repair value (ARV) is the estimated market value of a property once planned repairs are done, based on sales of similar renovated homes.
Amortization: Amortization is paying off a loan in regular payments, each split between interest and principal, until the balance reaches zero.
Appreciation: Appreciation is the increase in a property’s value over time, from market forces or from improvements you make.
Assignment fee: An assignment fee is what a wholesaler is paid for transferring a purchase contract on a property to an end buyer.
Break-even occupancy: Break-even occupancy is the share of potential income a property must collect to cover its operating expenses and loan payments.
BRRRR method: BRRRR means buy, rehab, rent, refinance, repeat: a strategy that pulls most of your cash back out of one rental to fund the next.
Cap rate: Cap rate is a property's net operating income divided by its price plus any up-front repairs: the yearly pre-tax return if you paid all cash.
Capital expenditures (CapEx): Capital expenditures (CapEx) are large, infrequent costs to replace or upgrade major parts of a property, such as a roof or furnace.
Cash flow: Cash flow is the pre-tax money a rental property has left each month or year after vacancy, operating expenses, reserves and loan payments.
Cash-on-cash return: Cash-on-cash return is a rental's annual pre-tax cash flow divided by the total cash you invested to buy it.
Cash-out refinance: A cash-out refinance replaces your mortgage with a larger loan and pays you the difference in cash, turning equity into money you can use.
Closing costs: Closing costs are the lender, title and other fees plus prepaid items you pay to complete a real estate purchase, sale or refinance.
Debt service: Debt service is the total of the loan payments, principal plus interest, that a property owner owes a lender over a period, usually a year.
Debt service coverage ratio (DSCR): DSCR is a property's net operating income divided by its annual loan payments, showing how easily the income covers the debt.
Effective gross income: Effective gross income is the potential rent of a rental property minus vacancy and unpaid rent, plus other income such as laundry or parking.
Equity multiple: Equity multiple is the total cash an investment returns divided by the total cash invested, showing how many times you got your money back.
Gross rent multiplier (GRM): Gross rent multiplier (GRM) is a property's price divided by its annual gross rent, a quick way to compare rentals before expenses.
Hard money loan: A hard money loan is a short-term, higher-cost loan from a private lender, secured by the property and often used for flips and rehabs.
Holding costs: Holding costs are the interest, taxes, insurance and utilities you pay to own a property while it is being fixed up, leased or sold.
House hacking: House hacking means living in one part of a property and renting out the rest so the rent covers some or all of your housing cost.
Internal rate of return (IRR): IRR is the annual rate of return on a deal over the full hold, counting the size and timing of every cash flow, including the sale.
Loan points: Loan points are upfront lender fees paid at closing, where one point equals 1% of the loan amount.
Loan-to-value (LTV): Loan-to-value (LTV) is a loan amount divided by the property's value, the ratio lenders use to cap how much you can borrow.
Maximum allowable offer (MAO): Maximum allowable offer (MAO) is the highest price you can pay for a property and still hit your target profit after repairs and costs.
Net operating income (NOI): Net operating income (NOI) is a property's yearly income after operating expenses, before mortgage payments and income taxes.
Operating expenses: Operating expenses are the recurring costs of running a rental, such as taxes, insurance, management and repairs, not including the mortgage.
PITI: PITI is the full monthly mortgage payment: principal, interest, property taxes and insurance.
Private mortgage insurance (PMI): Private mortgage insurance (PMI) is a premium you pay that protects the lender when you put less than 20% down on a conventional loan.
Rent-to-price ratio: The rent-to-price ratio is the monthly rent on a property divided by its purchase price, used as a quick first screen for rental deals.
Seasoning period: A seasoning period is how long you must own a property or hold its loan before a lender will refinance it, commonly 6 to 12 months.
Turnkey property: A turnkey property is a renovated rental, often with a tenant and manager in place, sold ready to produce income from day one.
Vacancy rate: Vacancy rate is the share of a rental's potential rent lost because the unit sits empty, expressed as a percentage.
Wholesaling: Wholesaling means putting a property under contract and passing that contract to another investor for a fee, usually without owning it.