o Cap Rate: A ratio of two variables – net operating income and the current value or sale price or a property – which helps to determine the potential return on an investment.
o Self-Directed IRA: An individual retirement account (IRA), which allows alternative investments for retirement savings. Some examples of these alternative investments are: real estate, private mortgages, private company stock, oil and gas LPs, precious metals, horses, and intellectual property.
o 1031 Exchange: “1031 exchange” is the nickname used to discuss Section 1031 of the U.S. Internal Revenue Service’s tax code. This section states that if an individual exchanges one investment property for another via a 1031 exchange, they may be able to defer capital gains (or losses) that they would otherwise have to pay at time of sale.
o Real Estate Leverage: Real Estate Leverage is the use of various financial instruments or borrowed capital to purchase and/or increase the potential return of an investment.
o Depreciation: The monetary value of an asset decreases over time due to use, wear and tear or obsolescence. This decrease is measured as depreciation.
o Return on Investment (ROI): A ROI measures the amount of return on an investment, relative to the investment’s cost.
o Volatility: A statistical measure of the dispersion of returns for a given security or market index.
o Inflation Protection: Protection of a long-term policy, which offers benefits in the form of a small part of the actual cost of a person’s long term benefits.
o Liquidity: The availability of liquid assets to a market or company.
o Risk: The possibly of financial loss occurring as the result of owning a real estate investment.
o Absorption Rate: The number of months it would take to sell the homes that are currently listed. It tells us the rate at which a market – or a particular sector of the market – sells over a specified time frame.
o Foreclosure: The action of taking possession of a mortgage property when the mortgagor fails to keep up their mortgage payments.
o Short Sale: A sale of real estate in which the net proceeds from selling the property fall short of the debts secured by liens against the property. In other words, a short sale is an alternative to foreclosure whereby indebted owners get permission from a bank to sell their house for less than the outstanding mortgage on it.
o Real Estate Owned (REO): REO is used to describe a class of property owned by a lender – typically a bank, government agency, or government loan insurer – after an unsuccessful sale at a foreclosure auction.
o Market Value: The price the property would command in the open, competitive market.
o Investment Value: Investment Value is more subjective than market value because it is a reflection of the investor’s specific requirements, such as target cash flow or rate of return.
o Replacement Value: Replacement Value reflects the cost at current prices to replace or restore a property to its pre-existing condition and appearance.
o Highest & Best Use: The reasonable, probable and legal use of vacant land or an improved property, which is physically possible, appropriately supported, financially feasible, ad that results in the highest value.
o Gross Rent Multiplier (GRM): The ratio of the price of a real estate investment to its annual rental income before accounting for expenses such as property taxes, insurance, utilities, etc.
o Cash-On-Cash Return: A rate of return often used in real estate transactions that calculates the cash income earned on the cash invested in a property.
o Return on Investment (ROI): The ratio of profit made in a financial year as a percentage of an investment. In other words, ROI reveals the overall benefit (return) of an investment using the gain or loss from the investment along with the cost of the investment.
o Net Operating Income (NOI): A calculation used to analyze real estate investments that generate income. NOI equals all revenue from the property minus all reasonably necessary operating expenses.
o Appraisal: A professional analysis used to estimate the value of a property. This includes examples of sales of similar properties.
o Mortgage: A legal agreement by which a bank or other creditor lends money at interest in exchange for taking title of the debtor’s property, with the condition that the conveyance of the title
becomes void upon the payment of the debt.
o Crowdfunding: The practice of funding a project or venture by raising many small amounts of money from a large number of people, typically via the internet.
o Collateral: A form of insurance to the lender in case the borrower fails to pay back the loan. For example, if a person gets a mortgage, the collateral would be the house.
o Loan-To-Value (LTV): The relationship between a property value and the amount of loans against it. LTV is calculated by dividing the loan amount by the property value.
o Debt-To-Income (DTI): A debt-to-income ratio is the one way lenders (including mortgage lenders) measure an individual’s ability to manage monthly payment and repay debts. DTI is calculated by dividing total recurring monthly debt by gross monthly income, and it is expressed as a percentage.
o Adjusted Gross Income (AGI): Gross income minus adjustments to income.
o Capital Gain: A profit from the sale of property or an investment.