Explore the Essential Real Estate Terminology Every Investor Needs to Know with Our Comprehensive Term Library!
Alternative financing refers to a particular type of financial service, namely sub-prime lending (that is lending to people with relatively poor credit) by non-bank financial institutions. Alternative financing allows smaller businesses and people with low credit to finance projects as traditional banks will most likely not approve their loans. Peer to peer lending is a form of alternative financing.
The gradual paying off of a debt by periodic installments. Example: a $100,000 loan is arranged at an 8% interest rate. The borrower pays $10,000 in the first year. Of that payment, $8,000 is for the interest owed, and the remaining $2,000 serves to amortize the loan balance. After that payment, the loan balance will have been amortized to $98,000.
Usually the first, and the leading, tenant in a shopping center whose prestige and name recognition attracts other tenants and, it is hoped, shoppers. Anchor tenant generally pays rent rate lower than that paid by ancillary tenants.
An estimate of value, generally made by a professional appraiser (certified to meet certain education, experience, and knowledge requirements) who uses a systematic approach or process (including the analysis of market data) in order to reach a conclusion. An appraisal of a property might be made not only to determine a reasonable offering price in a
sale, but also to determine an appropriate loan size of a loan, to allocate a purchase price between land and building (improvements), to determine an appropriate amount of hazard insurance, or for estate tax purposes at the
Three Major Types of Appraisals:
Sales Comparison Approach: Sales comparison approach compares compares a subject property's characteristics with those of comparable properties which have recently sold in similar transactions.
Cost Approach: In cost approach pricing, the market price for the property is equivalent to the cost of land plus cost of construction, less depreciation. It is often most accurate for market value when the property is new.
Income Approach: The income approach is computed by taking the net operating income of the rent collected and dividing it by the capitalization rate (the investor's rate of return). It is most typically used for income producing properties.
ARV (After Repair Value)
After Repair Value (ARV) is the projected value of a property after repairs have been made to it, based on comparable properties in the area. ARV% = (Price+Repair Cost)/After Repair Value - Click here to see our ARV Loans for Fix and Flip projects.
Average Daily Rate
Average Daily Rate represents the average rental income per paid occupied room within a given time period, usually the average realized room rental per day. ADR along with the property's occupancy are the foundations for the property's financial performance.
A short-term loan that is used until a person or company secures permanent financing or removes an existing obligation. This type of financing allows the user to meet current obligations by providing immediate cash flow. The loans are short-term (up to one year) with relatively high interest rates and are backed by some form of collateral such as real estate or inventory. For example, let's say that a company is doing a round of equity financing that is expecting to close in six months. A bridge loan could be used to secure working capital until the round of funding goes through. In the case of an individual, bridge loans are common in the real estate market. As there can often be a time lag between the sale of one property and the purchase of another, a bridge loan allows a homeowner more flexibility.
Capitalization Rate (Also known as Cap Rate)
Capitalization rate, also known as cap rate, helps in evaluating a real estate investment and is rate of return on a real estate investment property based on the expected income that the property will generate. This rate can be used to estimate the investor's potential return on investment.
Capitalization Rate = Yearly Income/Total Value
Debt service is the amount you pay on a loan in principal and interest over a period of time (Usually calculated for a year).
Debt Service Coverage Ratio (DSCR)
Debt service coverage ratio is the amount of cash flow available to meet annual interest and principal payments on debt, including sinking fund payments. This ratio is typically used by a lender when determining income property loans. This ratio should ideally be over 1. That would mean the property is generating enough income to pay its debt obligations.
General calculation: DSCR = Net Operating Income / Total Debt Service
Deed of Trust
A legal instrument used in many states in lieu of a mortgage, where legal title to a property is vested in one or more trustees to secure the repayment of a loan.
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. As security for the promissory notes, the borrower transfers a real property interest to a third-party trustee. Should the borrower default on the terms of her loan, the trustee may take full control of the property to correct the borrower's default.
Failure to fulfill an obligation or promise, or to perform specific acts.
Reasonable effort to obtain accurate and complete information in advance of a major decision; in real estate, this usually refers to the inquiries made in advance of a purchase or investment in a property. Due diligence considers the physical, financial, legal, and social characteristics of a property and its expected investment performance. The underwriting of a loan or investment is a form of due diligence, in the sense that constitutes a relatively detailed it risk assessment of that loan or investment. (i.e. Local market conditions and competition, environmental hazards).
A financial instrument held by a third party on behalf of the other two parties in a transaction. The funds are held by the escrow service until it receives the appropriate written or oral instructions or until obligations have been fulfilled. Securities, funds and other assets can be held in escrow.
A lien (often a deed of trust or a mortgage) that has priority over all other liens. In cases of foreclosure, the first mortgage will be satisfied before other mortgages.
Fix & Flip
A type of business / investment strategy involving the purchase of properties requiring some immediate repairs to attempt to make a profit by selling the house quickly at a higher price.
A situation in which a homeowner is unable to make full principal and interest payments on his/her mortgage, which allows the lender to seize the property, evict the homeowner and sell the home, as stipulated in the mortgage contract.
The charge for the privilege of borrowing money, typically expressed as an annual percentage rate.
A charge against property making it security for the payment of a debt, judgment, mortgage or taxes; it is a type of encumbrance.
Example: David wants to buy a home, but needs a loan to complete the purchase. David offers a lender a mortgage, which would create a lien on the property as security (collateral) for the payment of the debt.
LLC (Limited Liability Company)
A legal organizational form offering limited liability protection for the owners and which may be treated as a partnership for federal income tax purposes. An LLC is often used as a way to own real estate because it provides many of the legal advantages of a corporation along with the tax advantages of a partnership.
LTC (Loan to Cost Ratio)
A ratio used in commercial real estate construction to compare the amount of the loan used to finance a project to the cost to build the project. If the project cost $1 million to complete and the borrower was asking for $800,000, the loan-to-cost (LTC) ratio would be 80%. The costs included in the $1 million cost figure would be land, construction materials, construction labor, professional fees, permits and so on.
LTV (Loan to Value Ratio)
The amount borrowed compared to the cost or value of the property purchased. Lenders often require that a loan-to-value ratio not exceed a specified amount, unless a borrower also purchases mortgage insurance.
Example: Susan borrows $75,000 of the total $100,000 purchase price of her home. The loan-to-value ratio is 75%.
Example: A mortgage loan may have a maturity of 30 years. Periodic payments are established so that the loan principal will amortize by the maturity date.
A debt instrument, secured by the collateral of specified real estate property, that the borrower is obliged to pay back with a predetermined set of payments. Mortgages are used by individuals and businesses to make large real estate purchases without paying the entire value of the purchase up front.
Example: Tom wants to buy a home, but needs a loan to complete the purchase. As collateral, Tom offers a mortgage on the property to a lender; if Tom later defaults on the loan, the lender has a lien on the property from the mortgage, and can take possession of the property.
Net Operating Income (NOI)
Net operating income (NOI) is a calculation used to analyze real estate investments that generate income. Net operating income equals all revenue from the property minus operating expenses.
A property might generate revenue from a number of sources (rents, parking fees, and other services such as vending and laundry machines). Operating expenses are those required to run and maintain the building and its grounds (insurance, property management fees, utilities, property taxes, repairs and janitorial fees).
NOI is a before-tax figure that also excludes principal and interest payments on loans, capital expenditures, depreciation and amortization.
Occupancy rate is the number of units in a building that are rented compared to the total number of units in the building.
Example: An apartment building has 25 units, 15 of which have been rented out. Therefore, the building would have a 60% occupancy rate.
Passive Income Investing
An investment strategy involving limited ongoing buying and selling actions. Passive investors will purchase investments like apartments with insource funding No-doc rental loan with the intention of long-term appreciation. Unlike active investors, passive investors buy a security and typically don't actively attempt to profit from short-term price fluctuations. Passive investors instead rely on their belief that in the long term the investment will be profitable. Real estate is a common form of passive investing.
A group of investment assets.
Example: Dan's real estate portfolio consisted of equity shares of three retail shopping centers, two multi-family buildings, and one self-storage facility, and also included shares of loans on a hotel and two single-family residences.
Preliminary Title Report
A report issued by a title company before a transaction, stating a willingness to insure title upon closing.
Example: The buyer's attorney arranged for a preliminary title report when the property was put under contract, to discover whether there were any legal or title impediments to be cleared before closing.
The amount of money raised by a mortgage or other loan that still remains after some of that amount may have been amortized by earlier payments. Principal can be contrasted to the interest paid on the loan.
Example: Harry arranged a amortizing loan of $100,000 principal amount at a 6% interest rate. The first monthly payment is $1,200 and includes $500 interest and $700 of principal amortization; following the payment, the principal balance be $99,300.
A register of rents including the names of tenants and the amount of rent they pay. This typically involves an official written record of names or events or transactions.
The process of restoring and improving a property to a satisfactory condition through repair and renovation. Rehabs bring a property back to a preferable manner of living which makes contemporary use possible while still preserving significant character-defining features. This also includes adaptive use.
Evidence that the owner of real property is in lawful possession thereof; it is evidence of ownership. Usually a property owner transfers his title by means of a legal document called a “deed,” which must be in writing and meet other local requirements. A deed should convey good and marketable title; “good” means that the title is valid, and “marketable” means that it is reasonably free from doubt or litigation, so that it can be readily sold.
Example: Title to land does not mean merely that a person has the right of possession, because one may have the right of possession but not have title. Title is evidence of true ownership of the land, with all the rights that signifies.
Example: Karen sold land to Susan. Title to the property was transferred at closing by the deed that Susan received.
An insurance policy that assures good title is transferred in the course of a sales or financing transaction. This insurance covers the legal fees and expenses that may be necessary if a claim is made against one's ownership of the property. Different title policies offer different extents of coverage; for example, one can purchase "standard" coverage or "extended" coverage.
There are two common types of policies: a lender's policy that protects a lender (or the "mortgagee") on the property, and a buyer's policy that protects the buyer (or the "mortgagor").
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