1031 Exchange
A provision in the U.S. tax code (Section 1031) that allows a real estate investor to defer capital gains taxes by reinvesting proceeds from a property sale into a 'like-kind' replacement property. The investor must identify the replacement within 45 days and close within 180 days of the original sale. Done repeatedly, 1031 exchanges allow investors to compound wealth while deferring taxes indefinitely.
70% Rule
A heuristic used by house flippers and wholesalers: pay no more than 70% of a property's after-repair value (ARV) minus estimated repair costs. For example, if ARV is $300,000 and repairs are $40,000, the max offer is ($300,000 × 70%) − $40,000 = $170,000. The rule bakes in room for profit, holding costs, and closing costs.
After-Repair Value (ARV)
The estimated market value of a property after all planned renovations are complete. ARV is the foundation of fix-and-flip analysis and the BRRRR strategy — it determines the refinance value and sets the ceiling for acquisition price. ARV is typically estimated using comparable sales (comps) of similar renovated properties nearby.
Amortization
The process of paying down a loan through scheduled monthly payments, where each payment covers both interest and a portion of principal. Early in a mortgage, most of each payment goes to interest. Over time, the proportion shifts toward principal. A 30-year fixed mortgage is fully amortized — meaning the balance reaches zero — after 360 payments.
Appreciation
An increase in a property's market value over time. Appreciation can be natural (driven by market forces and inflation) or forced (created by renovations, improved management, or higher rents). Forced appreciation is the primary value-add lever in multifamily investing — raising NOI by reducing expenses or increasing income raises the property's value proportionally.
Asset Class
A classification of property type or quality. Residential asset classes include single-family, duplex/triplex/fourplex, and multifamily (5+ units). Within these, Class A refers to newer, high-end properties; Class B to mid-range properties in good condition; and Class C to older or lower-income properties requiring more management. Each class carries different risk, return, and financing characteristics.
BRRRR
An investment strategy acronym: Buy, Rehab, Rent, Refinance, Repeat. An investor purchases a distressed property below market value, renovates it, rents it out, then refinances based on the improved value to pull out invested capital. That capital is then recycled into the next deal. The goal is to leave little or no money in the deal while still owning a cash-flowing rental.
Break-Even Point
In refinancing, the number of months required for cumulative monthly savings to equal the upfront closing costs. If a refinance costs $5,000 and saves $200/month, the break-even is 25 months. If you plan to stay in the home longer than 25 months, refinancing makes financial sense. Also used in fix-and-flip to describe the minimum sale price needed to recover all costs.
Cap Rate (Capitalization Rate)
A property's net operating income (NOI) divided by its purchase price or current market value, expressed as a percentage. Cap rate measures a property's income potential on an all-cash basis, ignoring financing. It's useful for comparing properties in the same market but should not be used to evaluate your personal return on a leveraged investment — for that, use cash-on-cash return.
CapEx (Capital Expenditures)
Major one-time expenditures on a property's long-lived components — roofs, HVAC systems, water heaters, foundation repairs, and similar items. Unlike routine repairs, CapEx must be depreciated over time for accounting purposes. Conservative investors reserve 5–10% of gross rent annually for CapEx to avoid being caught off guard by large replacements.
Cash Flow
The amount of money remaining after all property expenses and debt service are paid from rental income. Positive cash flow means the property generates income above all costs each month. Negative cash flow ('alligator' deals) means the investor must pay out-of-pocket monthly to hold the property. Most buy-and-hold investors prioritize positive monthly cash flow as a primary underwriting criterion.
Cash-on-Cash Return
Annual pre-tax cash flow divided by total cash invested (down payment + closing costs + rehab costs). This is the most practical return metric for leveraged real estate investments because it accounts for financing. A 7% cash-on-cash return on a $50,000 cash investment means $3,500 in annual cash flow. Unlike cap rate, cash-on-cash varies based on your financing terms.
Closing Costs
Fees and expenses paid at the close of a real estate transaction, typically ranging from 2–5% of the purchase price for buyers and 6–10% for sellers. Buyer closing costs include loan origination fees, appraisal, title insurance, escrow fees, and prepaid items like taxes and insurance. Sellers typically pay agent commissions (5–6%) plus transfer taxes, title, and escrow.
Comparable Sales (Comps)
Recently sold properties similar in size, condition, location, and features used to estimate the market value of a subject property. Appraisers use comps to set value for mortgage lending; investors use comps to estimate ARV for fix-and-flip and BRRRR deals. Good comps are within the same neighborhood, sold within 6 months, and comparable in square footage and bedroom/bathroom count.
Debt Coverage Ratio (DSCR)
A property's net operating income (NOI) divided by its annual debt service (total mortgage payments). A DSCR of 1.0 means the property's income exactly covers its debt. Lenders typically require a minimum DSCR of 1.20–1.25 for investment property loans, meaning NOI must be at least 20–25% greater than the mortgage payment. DSCR loans use this metric instead of personal income to qualify borrowers.
Deed
The legal document that transfers ownership of real property from one party to another. Common types include a warranty deed (seller guarantees clear title), a quitclaim deed (transfers whatever interest the grantor has, without guarantees), and a trustee's deed (used in foreclosure sales). A deed must be signed, notarized, and recorded with the county to be legally effective.
Depreciation
A non-cash tax deduction that lets rental property owners recover the cost of a building over 27.5 years (residential) or 39 years (commercial). The land portion of a property is not depreciable. Depreciation reduces taxable rental income without reducing actual cash flow, making it one of the most powerful tax benefits of real estate investing. A $200,000 building creates a $7,273/year deduction.
Down Payment
The portion of a property's purchase price paid in cash at closing, with the remainder financed by a mortgage. For owner-occupied homes, FHA loans require as little as 3.5% down; conventional loans typically start at 5%. Investment properties generally require 15–25% down. A larger down payment reduces the loan amount and monthly payment but reduces cash-on-cash return by increasing invested capital.
Duplex
A residential property containing exactly two separate dwelling units, each with its own entrance, kitchen, and living space. Duplexes are popular for house hacking: an owner-occupant can live in one unit and rent the other, qualifying for owner-occupant financing (lower rates, lower down payment) while generating rental income.
Earnest Money
A deposit made by a buyer to demonstrate serious intent to purchase, typically 1–3% of the purchase price. Earnest money is held in escrow and applied toward the purchase price at closing. If the buyer backs out without a valid contractual contingency (inspection, financing, appraisal), the seller typically keeps the earnest money as compensation for taking the property off the market.
Equity
The difference between a property's current market value and the outstanding mortgage balance. Equity builds through loan paydown (principal payments), appreciation, and forced improvements. Investors access equity through cash-out refinancing or HELOCs to fund additional investments, a strategy central to the BRRRR method.
Escrow
A neutral third-party arrangement where funds, documents, and instructions are held until all conditions of a transaction are met. In a real estate sale, an escrow company holds the earnest money and coordinates closing. In mortgages, an escrow account held by the lender collects monthly portions of property taxes and insurance, then pays those bills when due.
FHA Loan
A mortgage insured by the Federal Housing Administration, designed for buyers with lower credit scores or smaller down payments. FHA loans require as little as 3.5% down with a 580+ credit score, or 10% down with a 500–579 score. FHA loans allow owner-occupants to purchase 2-4 unit properties at favorable terms — a key tool for house hacking. FHA loans require mortgage insurance premiums (MIP) regardless of down payment size.
Fix and Flip
An investment strategy where an investor purchases a property below market value, renovates it to improve its condition and value, then sells it quickly for a profit. Successful flippers rely on accurate ARV estimation, conservative rehab budgets, and tight project timelines to maximize returns. Holding costs (interest, taxes, insurance, utilities) make delays expensive.
Gross Rent Multiplier (GRM)
Purchase price divided by annual gross rent. A property selling for $240,000 with $24,000 in annual rent has a GRM of 10. Lower GRM suggests better value relative to income. GRM is a quick, rough filter — it ignores expenses and vacancy — and is best used as an initial screening tool before running full NOI and cash flow analysis.
Hard Money Loan
A short-term, asset-based loan from a private lender, typically used by investors for acquisitions, fix-and-flip projects, or BRRRR deals. Hard money lenders base their decision primarily on the property's value (especially ARV) rather than the borrower's creditworthiness. Rates are significantly higher (8–15%+) and terms short (6–24 months), but funding is faster and underwriting more flexible.
HOA (Homeowners Association)
An organization that manages a planned community, condominium building, or subdivision. HOA fees cover shared amenity maintenance, landscaping, insurance for common areas, and reserves. For investors, HOA fees are an operating expense that reduces NOI. Some HOAs prohibit rentals or require landlord approval — always review HOA rules before purchasing an investment property.
House Hacking
A real estate strategy where you purchase a multi-unit property (or a home with rentable space), live in one unit, and rent out the remaining units to offset or eliminate your housing cost. Because you live in the property, you qualify for owner-occupant financing — as low as 3.5% down with FHA — making it one of the most accessible entry points into real estate investing.
Internal Rate of Return (IRR)
A comprehensive return metric that accounts for the time value of money across a multi-year investment period. IRR calculates the annualized return considering all cash flows: initial investment, annual cash flow, and the eventual sale proceeds. Unlike cash-on-cash return (annual only) or cap rate (no financing), IRR is the most complete picture of a real estate investment's performance over time.
Lease
A legal contract between a landlord and tenant that establishes the terms of tenancy — rent amount, payment due date, lease duration, security deposit, maintenance responsibilities, and rules for the property. Month-to-month leases offer flexibility; fixed-term leases (usually 12 months) provide rent stability. Well-written leases are a landlord's primary protection against disputes.
Lien
A legal claim on a property as security for a debt or obligation. Mortgage liens give lenders the right to foreclose if payments are missed. Mechanics' liens can be placed by contractors who weren't paid for work. Tax liens arise from unpaid property taxes. Liens must typically be paid off before a property can be sold or refinanced — title searches reveal existing liens.
Loan-to-Value Ratio (LTV)
The mortgage balance divided by the property's appraised value, expressed as a percentage. A $160,000 loan on a $200,000 property is 80% LTV. Lenders use LTV to assess risk — higher LTV means more risk for the lender. Investment property cash-out refinances are typically limited to 75% LTV. Lower LTV results in better interest rates and eliminates PMI at 80% or below.
MAO (Maximum Allowable Offer)
The highest price a wholesaler or investor can pay for a property while still leaving acceptable profit margin for themselves and their end buyer. Commonly calculated as (ARV × investor margin %) − repairs − assignment fee − other costs. The 70% rule is the most common MAO formula.
Market Value
The price a property would sell for in an arm's-length transaction between a willing buyer and seller, with neither acting under duress and both having reasonable knowledge of the relevant facts. Market value is established by comparable sales and confirmed by appraisal. It is distinct from assessed value (used for property taxes) and list price (what a seller asks).
Net Operating Income (NOI)
A property's gross rental income minus all operating expenses, before debt service (mortgage payments). NOI = Gross Rent − Vacancy − Operating Expenses (taxes, insurance, management, maintenance, CapEx). NOI is the numerator in cap rate calculations and the income stream that determines a commercial property's value. Higher NOI = higher property value at any given cap rate.
Operating Expenses
All costs required to operate a rental property, excluding mortgage payments. Common operating expenses: property taxes, insurance, property management fees, maintenance and repairs, CapEx reserves, landscaping, utilities paid by landlord, vacancy loss, and HOA fees. Operating expenses typically run 35–50% of gross rent for single-family properties and 45–55% for larger multifamily.
PMI (Private Mortgage Insurance)
Insurance required by conventional lenders when a borrower's down payment is less than 20%. PMI protects the lender (not the borrower) in case of default. PMI typically costs 0.5–1.5% of the loan amount annually, added to monthly payments. Once the borrower reaches 20% equity (either through paydown or appreciation), PMI can typically be removed.
Passive Income
Income that requires minimal active involvement to maintain. Rental income is considered passive income for tax purposes by the IRS, which has specific rules about how passive losses can be deducted. Rental activity is classified as passive unless the taxpayer qualifies as a Real Estate Professional. Many investors pursue rental property specifically for its passive income characteristics.
Principal
The original loan amount borrowed, as distinct from interest. Each mortgage payment consists of principal (which reduces the outstanding balance) and interest (the cost of borrowing). In early amortization, most of each payment goes to interest. A $300,000 mortgage at 7% has a first-month interest charge of about $1,750, with only a small portion reducing principal.
Pro Forma
A projected financial statement showing expected income, expenses, and returns for a real estate investment, typically covering 1–10 years. Pro formas project future rent increases, expense growth, and eventual sale proceeds. The quality of a pro forma depends entirely on the realism of its assumptions — sellers often provide optimistic pro formas that require critical review.
Property Management
The operation, maintenance, and oversight of rental property on behalf of the owner. Self-management saves money (typically 8–10% of collected rent) but requires time and availability. Professional property managers handle tenant screening, rent collection, maintenance coordination, lease renewals, and evictions. For investors with multiple properties or full-time jobs, professional management is often worth the cost.
REIT (Real Estate Investment Trust)
A company that owns, operates, or finances income-producing real estate and trades on public stock exchanges. REITs allow investors to gain real estate exposure without directly owning properties. By law, REITs must distribute at least 90% of taxable income as dividends. REITs offer liquidity and diversification but lack the leverage, tax benefits (depreciation), and control of direct property ownership.
Rehab
The renovation or improvement of a property to improve its condition, functionality, or value. Rehab work ranges from light cosmetic updates (paint, flooring, fixtures) to full gut renovations (structural, plumbing, electrical). Accurate rehab cost estimation is one of the hardest skills in real estate — unexpected costs are the most common reason fix-and-flip and BRRRR deals underperform.
Rent-to-Value Ratio
Monthly gross rent divided by property purchase price, expressed as a percentage. A property renting for $2,000/month and worth $200,000 has a 1% rent-to-value ratio. The '1% rule' (monthly rent ≥ 1% of purchase price) is a rough filter suggesting a property might cash flow, but it ignores expenses, market conditions, and financing — use it as a quick screen, not a decision tool.
Section 8 (Housing Choice Voucher)
A federal rental assistance program administered by the U.S. Department of Housing and Urban Development (HUD) that subsidizes rent for low-income tenants. The government pays a portion of rent directly to the landlord; the tenant pays the remainder. Section 8 can provide reliable rent payments and high demand in some markets but requires meeting HUD property standards and navigating government inspection processes.
Seller Financing
A transaction in which the seller acts as the lender, financing part or all of the purchase price directly to the buyer. Also called owner financing or a purchase money mortgage. Seller financing can allow buyers to skip traditional lenders and negotiate flexible terms. It's particularly useful for properties that don't qualify for conventional loans or when buyers have non-traditional income.
Subject-To
A creative acquisition strategy where an investor takes title to a property 'subject to' the existing mortgage, which remains in the seller's name. The investor makes the mortgage payments but doesn't formally assume the loan. Subject-to transactions can allow investors to acquire properties without new financing, but carry risks including the 'due-on-sale' clause that gives lenders the right to call the loan due.
Title Insurance
An insurance policy protecting against losses from title defects, liens, or ownership disputes discovered after a property is purchased. Owner's title insurance (paid once at closing) protects the buyer; lender's title insurance is typically required by the mortgage lender. Title insurance covers issues like undiscovered liens, errors in public records, forged documents, and undisclosed heirs.
Turnkey Property
A rental property that is fully renovated, tenant-occupied, and managed — ready for an investor to purchase with minimal additional work. Turnkey properties offer passive entry into real estate investing but typically sell at a premium that compresses returns. Remote investors often target turnkeys in strong rental markets as a way to invest outside their local area.
Vacancy Rate
The percentage of a property's available rental time that goes unrented. A property vacant for 1 month per year has an 8.3% vacancy rate. Conservative underwriting uses 8–10% vacancy even in tight markets to account for tenant turnover and unexpected vacancies. Markets, property types, and price points vary — multi-unit properties in urban areas often see lower vacancy than single-family in rural areas.
Wholesaling
A real estate strategy where an investor gets a property under contract at a below-market price, then assigns that contract to an end buyer for a fee — typically $5,000–$20,000 — without ever taking ownership of the property. Wholesalers act as deal finders and negotiators, connecting motivated sellers with cash buyers. No significant capital is required, but success depends on finding deeply discounted deals.
Disclaimer: All definitions are for educational purposes only and do not constitute financial, legal, or tax advice. Real estate regulations and practices vary by state and locality. Consult licensed professionals before making real estate decisions.