A tax term that refers to the act of selling one investment property and then buying another with the proceeds in order to avoid paying capital gains taxes on the sale. This allows your real estate investments to continue growing tax-deferred and allows you to continue to put all of your real estate profits to work for you, as opposed to paying capital gains taxes after every property sale. In order to take full advantage of a 1031 exchange, the second (newly-acquired) property must close within 180 days of the sale of the first property and be of equal or higher value. Please review our guide to 1031 exchanges for more information.
An FHA loan that lets you borrow money to buy (or refinance) a home and borrow for home improvements in a single loan.
With an absolute net lease, tenants are responsible for virtually every possible payment, including major repairs. Triple net leases generally have a few maintenance-related limitations. For example, if a building has structural issues because of its age, that may still fall to the landlord under a triple net lease. Under an absolute net lease, it would be the tenant’s responsibility.
A summary of title, including the details of prior deeds or encumbrances that relate to the property, ultimately proving an owner's right to sell it.
An accounting method that depreciates a property faster than a standard depreciation schedule, typically in the first year or two of ownership.
My Glossary DescriptionA provision in a loan agreement stating the mortgage lender can demand payment in full in the event of default.
Individuals who have a net worth of over $1 million (excluding the value of a primary residence) or have an annual income of $200,000 or more for the past two years filing individually -- $300,000 or more if married filing jointly.
Active Adult communities are 55+ communities that offer independent living options for seniors. Active Adult has replaced retirement communities in the nomenclature because many of the people who move to these communities are not retired. These can be townhouses, condos, or single-family homes within a community. Most units in active adult communities are owned by the residents although the percentage of renters is growing.
When a seller accepts an offer from a buyer that's contingent upon the buyer meeting certain conditions such as mortgage approval, home inspection, or getting the buyer's home under contract.
A seller has accepted an offer with contingencies, but keeps the listing active to promote backup offers in case the current offer falls through.
Adaptive reuse is the process through which a building is updated or modified for a new user. An example of this would be when a former warehouse is converted into residential lofts. Adaptive reuse has become popular as industrial neighborhoods are transformed into mixed-use developments.
When a real estate sales contract is changed or amended in any way, the change or amendment is called an addendum. The updated contract is signed by both the buyer and seller.
A type of mortgage loan in which the interest rate adjusts periodically based on a set schedule. The interest rate is usually tied to a specific economic index.
See contract for deed.
The annualized rate of return takes the total rate of return and divides it by the number of years held in order to determine the rate per year. This is useful in calculating returns over time. The overall rate of return is the gain or loss a property generates minus the initial costs.
The annual total interest rate charged on a mortgage or loan. The APR includes fees, often making it higher than the base interest rate.
A formal opinion of value derived from a licensed appraiser. Appraisals are often used by banks or lending institutions to determine a property's value before finalizing a loan for that property.
The increase in an asset's value over time.
When a property is sold as-is, no repairs or remedies will be made to sell the home.
The value of a property determined by a tax collector and used for tax purposes. The assessed value can differ from the actual appraised value.
The transfer of rights or ownership of a specific contract or agreement to a new party. For example, you can assign a lease, contract for deed, or mortgage.
A mortgage in which the buyer assumes the existing mortgage from the seller. The new buyer becomes liable for the mortgage, releasing the previous seller from the mortgage note.
A type of mortgage loan in which the remaining unpaid principal balance becomes payable in one lump sum on a specified date.
A legal proceeding in which a debtor cannot pay their legal debts. An individual or company can file bankruptcy under Chapter 11, Chapter 13, or Chapter 7. Depending on the chapter and circumstances, debts can be reallocated according to a specified repayment schedule or discharged.
Represents one-hundredth of one percent (0.01%), used primarily to express differences in interest rates or returns. For example, 200 basis points represents 2%.
Can refer to several different roles depending on what it relates to. In a mortgage, the beneficiary is the lender. A beneficiary can also be the person who inherits property or an IRA, such as a self-directed IRA, if the primary owner passes away.
A document that specifies the transfer of a property or asset. It specifies the collateral being transferred and the amount it was transferred for.
A type of mortgage that uses multiple properties as collateral for one loan. The mortgage "blankets" several assets instead of just one.
When one party in a lease or contract fails to fulfill their duties according to the agreement. If a contract is breached, there are specific consequences that may include eviction, foreclosure, or loss of an earnest money deposit.
A short-term loan that people use until they can finalize their long-term loan. Bridge loans can last a few days to a few months and often charge much higher interest rates than longer-term loans.
An agent licensed by the National Association of Realtors who acts as a representative for a buyer or seller to oversee a real estate transaction in exchange for a commission.
A firm or company that helps buyers and sellers transact in exchange for a commission or fee. Realtors are required to work with a brokerage firm.
An opinion of value from a licensed broker often used by banks, lending institutions, and real estate investors. BPOs can be calculated based on the interior of the home or solely on the exterior condition.
A set of standards that govern rules for building. These codes are often set by cities or counties.
A document that summarizes a company's or individual's identity, what they do, and their plan or goals over the next one to five years.
Capital calls, or additional capital contributions, are rarely used provisions in private equity real estate partnerships that grant the sponsor or general partner the power to seek additional capital from investors or limited partners on top of their existing equity commitment. In real estate, capital calls are almost always made when a property has entered a state of distress. The property’s net operating income has become impaired due to lower occupancy or some other situation, threatening its ability to meet working capital needs and service its debt.
If allocated properly, capital calls can help a property or development project remain viable and avoid worse outcomes for investors, such as bankruptcy or an acquisition or recapitalization at a sharply lower valuation. Either scenario would almost surely wipe out equity holders. Moreover, capital calls are almost always less costly and more efficient sources of capital than raising new debt or equity, which can sometimes be difficult to come by and come with onerous terms that are more punitive to existing equity holders.
Income earned when an asset is sold for more than its purchase price. Capital gains are taxed at different rates depending on if it's a short-term capital gain or long-term capital gain. Short-term capital gains apply to assets owned for a year or less.
Improvements made to a property that increase its overall value or worth. Some capital improvements are tax-deductible.
This is the legal structure of all the financing sources that make up the purchase of a commercial real estate asset, as well as any improvements that are subsequently made to the property. Generally, the most senior form of financing is on the bottom of a capital stack, and more subordinate types of debt are “stacked” on top of it. For example, senior debt is often the most high-priority type of debt (on the bottom) in a capital stack, and is often followed by mezzanine debt, preferred equity, and common equity. Generally speaking, the higher you are in a capital stack, the higher your risk level.
Short for “capitalization rate,” a property’s cap rate is the amount of net operating income, or NOI, a property is expected to generate, expressed as a percentage of its acquisition cost or current market value. For example, if a certain property is expected to generate $60,000 in net operating income and it cost $1,000,000 to acquire the property, its cap rate would be 6%.
Monthly income produced by an asset. This could be rental income; dividends from a stock, ETF, or REIT; or a principal and interest payment from a mortgage note.
Also known as “cash yield,” this is the property’s net operating income divided by the actual dollar amount you invest in it. For example, if your actual out-of-pocket cost to acquire a certain property is $500,000 and it generates $50,000 in NOI, your cash-on-cash return is 10%.
A type of loan that lets homeowners with equity in their property refinance their mortgage and get cash. For example, a homeowner with $200,000 left on their mortgage might refinance to a $220,000 mortgage and get $20,000 in cash.
The Central Business District of a town is its commercial and business heart. Projects that are near or in a CBD are often desirable because the demand for office space is likely to remain strong. Overall vacancy rates for a CBD can also indicate the general health of a city’s economy.
Shows title or ownership and, in certain states, the transfer of ownership to a mortgage lender after foreclosure. Description
Shows the chain of ownership or conveyance of title on a specific parcel over time.
Office buildings and other facilities are rated using an informal system that looks at the condition of a building, location, amenities, infrastructure and technology capabilities to determine how well the building rates. Class A buildings have updated interiors and are in prime locations while Class B buildings are generally at least 10-20 years old and may represent a value-add opportunity for investors. Class C buildings are at least 20 years old and will likely require significant renovation.
Additional costs incurred as part of closing a real estate transaction. Closing costs can vary, but typically range from two to five percent of the sale price. If bank financing is involved, they're usually higher.
A document that summarizes the debits and credits due to and from the buyer and seller in a real estate transaction.
Refers to an encumbrance on a title. This could be an incorrect legal description, a missing document, or other issues that need to be rectified before a property can be sold. Also called a defect in title.
Co-living is a type of leasing arrangement in which residents lease a generally smaller bedroom or apartment but share larger common areas. Some co-living apartments also include services such as housekeeping and all utilities as part of a single lease. Co-living arrangements are very common in student-focused housing and can also be seen in some senior communities.
A tangible asset that holds value, such as a vehicle or property, that secures a loan. Most banks require borrowers to pledge some type of collateral to be approved for a loan. If you get a home loan, the property you're buying is the collateral. If a borrower defaults on a loan, the bank takes possession of the collateral.
A fee paid to a broker, agent, or other professional in a real estate transaction.
A statement that a bank has approved a buyer or borrower for a home loan. Commitments are only valid for a specified period.
An examination of similar properties to determine a reasonable selling price. This may include currently for-sale and recently sold properties. Usually conducted by a Realtor.
The Compound Annual Growth Rate looks at the total time an investment is held and the total return to determine the rate of increase. CAGR is a less complex calculation than the Internal Rate of Return calculation (IRR) because it does not take multiple cash flows into account.
Interest calculated on a principal amount that also includes all accumulated interest. Compound interest is often used when evaluating investment growth over time.
A provision in a sales contract that requires a party to fulfill certain requirements before the contract becomes binding.
A seller-financed loan in which the seller or owner of the property provides financing for the buyer. The seller receives monthly payments over time and remains on the property title until the buyer fulfills their contract, when the property is given to the buyer. This can also be called an agreement for deed, installment contract, or land contract.
A loan that's not guaranteed or insured by the government and requires at least 20% down.
While a core investment is generally considered the most solid, a core-plus investment adds a little more risk but a higher rate of expected return. Core plus sits between core investments — the most secure and stable real estate investments — and value-add investments on a continuum of risk vs. return.
An additional signer on a loan. This is often used to help the primary borrower if they can't get financing. A co-signer is liable and responsible for the debt along with the primary borrower.
As the name implies, cost of capital refers to the cost of a company’s funds. In economic terms, this means the rate of return that an investor could have earned by putting money into a different investment with a similar risk profile -- so it’s the return that’s necessary to attract capital. For example, a company’s cost of debt capital is calculated by adding a risk premium to the rate a similar-duration risk-free bond is paying.
A promise made by a buyer or seller as a part of a contract.
Commercial Real Estate. This refers to any type of real estate that is leased out to tenants in order to generate income. Examples of the various types of commercial real estate include apartment buildings, self-storage facilities, offices, hotels, shopping malls, and more.
The number of days a property has been for sale. This is a helpful indicator to see how long, on average, it takes a property to sell.
Debt coverage ratio (DCR) -- Also known as debt service coverage ratio, or DSCR, this is an expression of a property's operating income relative to its debt obligations. When you buy a primary residence, lenders tend to consider your personal debt-to-income ratio, employment situation, etc. With investment properties, the income generation of the property plays a much larger role. In other words, lenders want to know that the property will generate enough rental income to comfortably pay the mortgage and all other expenses. For example, if a property generates $5,000 per month in net operating income and there's a $4,000 per month mortgage payment, this is a DSCR of 1.20. Higher is better, and a more favorable DSCR will typically qualify you for better borrowing terms.
The amount of money required to repay the debt on a specific asset.
Many REITs report their debt-to-capitalization or debt-to-total capitalization in order to express their leverage. For example, if a REIT has $3 billion in debt and the value of its outstanding common and preferred stock is $7 billion, this would imply that its debt is 30% of its total capitalization. REITs with relatively high debt-to-capitalization ratios are generally considered to be riskier than their lower-leverage counterparts.
This is a valuable way to assess a company’s ability to repay its debts. Debt-to-EBITDA tells investors how long it would take a company to repay all of its debt obligations. For example, a company with $10 millions in EBITDA last year and $50 million in debt would have a debt-to-EBITDA ratio of 5. For REITs, debt-to-EBITDA is also useful for comparing the leverage of different REITs to help assess the risk level of each.
An agreement between a borrower and a lender in which the borrower gives the property back to the lender and, in return, the lender forgives the borrower's debt. This is usually done to avoid foreclosure.
An instrument used to convey a property that has a lien. In some states, a mortgage is also called a deed of trust.
When a party, typically a borrower, fails to fulfill their responsibility for the agreement. The most common form of default is when the borrower falls behind on payments.
See cloud on title.
Required maintenance on a property stemming from lack of repairs or upgrades over time.
A judgment rendered against a borrower when a foreclosure sale doesn't produce sufficient funds to pay the mortgage debt in full.
A mortgage is delinquent when a payment is at least 30 days past due.
Property taxes that are past due. Some counties and states can place a lien on delinquent taxes. If they remain unpaid for a long time, this can become a tax deed and go to tax sale.
When you purchase certain business assets, you can immediately deduct their entire cost. On the other hand, some assets have to be deducted over a number of years, through a process known as depreciation. Real estate is an example of an asset that is depreciated over time for tax purposes. This makes traditional methods of calculating earnings less effective for real estate investments. After all, depreciation is essentially a “loss” for tax purposes, even though the value of the property doesn’t necessarily decline each year – in fact, the opposite is generally true.
A document provided by the seller disclosing information that's legally required about the property.
A property being sold out of necessity, such as a foreclosure, pending tax sale, bankruptcy, or because the property is in poor condition.
Money paid regularly by a company to its shareholders. Dividends can be paid from real estate ETFs, REITs, or crowdfunding investments.
When an entity is doing business under a different name, it can file a DBA.
The amount of money a property buyer can pledge or put toward the purchase of a property.
A clause in a contract or loan agreement that says the principal balance of the loan must be paid in full if a property is sold.
A specified amount of money placed into escrow after entering into a contract to purchase a property.
A legal agreement in which a property owner gives a certain part of the property to a third party for a specific use.
Stands for earnings before interest, taxes, depreciation, and amortization. EBITDA is considered to be a good indicator of a company’s operating profitability. EBITDA is also often used in conjunction with a company’s debt level to assess how leveraged the business is relative to its profitability.
The real income produced from a property before debt, including rent and additional income made from fees, services, or goods, minus vacancy and property expenses.
The government's right to take private property for public use upon payment of the property's reasonable value.
A claim or lien placed on a property.
A study used in commercial real estate to assess possible environmental impacts of development on the land or surrounding area.
The difference in value of what a property is worth in the current market and what's owed on it.
Equity multiple is one of the most useful metrics for evaluating real estate investment opportunities and is equal to the total projected profit of the investment plus your investment amount, divided by your investment amount. For example, if you expect a profit of $40,000 from a certain real estate opportunity that you’re investing $100,000, your equity multiple would be $140,000 divided by $100,000, or 1.4.
A real estate investment trust that primarily invests in commercial properties. The terms “REIT” and “equity REIT” are often used interchangeably. There is another type of REIT called a mortgage REIT, which owns mortgages, mortgage-backed securities, and other assets related to real estate (but not actual properties).
A third-party service, typically a title company or attorney, that handles all funds related to a real estate transaction until the contract has been fulfilled as agreed.
A special account that sets aside money for property taxes and insurance by the mortgagee or servicing company.
The agent responsible for handling all funds placed in escrow, including the disbursement or return of funds to either or both parties.
The real and personal property that's transferred to a beneficiary or heir upon death of the property owner.
The legal process a landlord can go through to remove a tenant from a property after a breach in contract.
A standard rental rate for the Housing Choice Voucher (Section 8) Program and other government housing programs run by the U.S. Department of Housing and Urban Development (HUD). Fair market rent is the fair going rate for a rental based on unit size and location.
The current as-is value of a property in the given market.
A government-sponsored enterprise that buys mortgages from banks, bundles them as mortgage-backed securities, and sells them to other banks, companies, or countries. Banks use funds from Freddie Mac to create more loans.
A governmental agency created in 1934 that provides mortgages to home buyers with as little as 3% down. An FHA mortgage is insured to protect the lender.
A government-sponsored enterprise that buys mortgages from banks, bundles them as mortgage-backed securities, and sells them on the secondary market. Funds from Fannie Mae help banks create more loans.
The greatest possible right of ownership or interest a property owner can have in a property.
Fintech is the umbrella term for startups that are investing in the financial services sector. This includes some of the “non-bank” mortgage lenders and service providers. Fintech lenders often incorporate automated processes and the bulk of the transaction takes place online.
A mortgage that has a priority lien over all other liens or encumbrances and is in the first position to be repaid.
A mortgage in which the interest rate remains the same over the life of the loan.
Forbearance is an agreement between a lender and borrower to pause or delay foreclosure proceedings for a temporary period of time. Typically, the borrower and lender work out a potential agreement such as a payment plan or trial modification.
The legal process taken by a lender to terminate the interest and rights a borrower has in a property after default. Foreclosures can be judicial or non-judicial. After the foreclosure, the property is auctioned off or returned to the bank, which often sells it as a bank-owned property.
A proceeding in which the lender eliminate a buyer's rights or interest in a property. Forfeiture is often used in a contract for deed.
Although it’s not as common of a metric as FFO, funds available for distribution, or FAD, is a metric that is designed to convey how much money a REIT has available to pay out to its shareholders. FAD is not a standardized metric, so many REITs have gotten away from using it, but some still use it. If a REIT reports its FAD, it is generally the best indicator of a REIT’s ability to cover its dividend without having to borrow money.
FFO is essentially the REIT version of earnings. FFO is different from net income because it adds the depreciation expense back in and also makes a few other adjustments. It is considered a more accurate way to determine the true health of a REIT.
A monetary donation from a family member or other source that's put toward the purchase of a home.<