Essential terms and definitions every real estate investor should know
The ratio of Net Operating Income (NOI) to property asset value. Calculated as: (NOI / Property Value) × 100. Expresses the rate of return on a real estate investment based on income.
Example: A property generating $50,000 in NOI with a value of $500,000 has a cap rate of 10%.
Annual pre-tax cash flow divided by total cash invested. Measures the return on actual cash invested, accounting for financing leverage.
Example: If you invest $70,000 and receive $8,400 in annual cash flow, your cash-on-cash return is 12%.
Total property income minus all operating expenses, before debt service. Calculated as: Gross Operating Income - Operating Expenses. Does not include mortgage payments, capital expenditures, or taxes.
Example: Annual rent of $60,000 minus $20,000 in operating expenses equals $40,000 NOI.
Ratio of Net Operating Income to annual debt service. Measures a property's ability to cover its debt obligations. Calculated as: NOI / Annual Debt Service. Lenders typically require minimum DSCR of 1.20-1.25.
Example: NOI of $50,000 with $40,000 annual debt service equals DSCR of 1.25.
Property price divided by gross annual rental income. Quick screening tool for comparing properties. Lower GRM suggests better value relative to income.
Example: A $300,000 property renting for $2,500/month ($30,000/year) has a GRM of 10.
The annualized rate of return accounting for the timing and magnitude of all cash flows over the investment period. Considers initial investment, periodic cash flows, and exit proceeds.
Example: An investment with $100k initial cost, $8k annual cash flow for 5 years, and $150k sale proceeds has an IRR of approximately 15.2%.
Loan amount divided by property value, expressed as a percentage. Indicates the amount of leverage on a property. Most lenders cap LTV at 75-80% for investment properties.
Example: A $200,000 loan on a $250,000 property equals 80% LTV.
The gradual repayment of a loan principal through regular payments over time. Each payment includes both principal and interest, with the principal portion increasing over the loan term.
Example: A 30-year amortization means the loan is fully repaid over 30 years through monthly payments.
A tax-deferred exchange allowing investors to sell a property and reinvest proceeds in a like-kind property while deferring capital gains taxes. Must identify replacement within 45 days and close within 180 days.
Example: Sell a rental property for $400k and buy a $500k property using 1031 exchange to defer all capital gains taxes.
Tax deduction for the theoretical wear and tear on a property over time. Residential rental properties are depreciated over 27.5 years. Building value only, not land.
Example: A $275,000 building (excluding land) generates $10,000 annual depreciation deduction.
Tax strategy that accelerates depreciation by identifying and separating personal property components (5-7 year life) from real property (27.5 years), front-loading tax deductions.
Example: Appliances, carpets, and fixtures may qualify for 5-7 year depreciation instead of 27.5 years.
Total potential rental income plus other income sources, minus vacancy and credit losses. The actual income collected before operating expenses.
Example: Potential rent of $100k + $5k other income - $5k vacancy = $100k GOI.
Recurring costs to operate and maintain a property. Includes property taxes, insurance, maintenance, management fees, utilities, HOA fees. Excludes mortgage payments and capital expenditures.
Example: Annual operating expenses: $8k taxes + $3k insurance + $4k maintenance + $3k management = $18k.
Major improvements or replacements that extend property life or add value. Examples: new roof, HVAC replacement, property renovations. Typically capitalized and depreciated rather than expensed.
Example: Replacing a roof for $15,000 is a capital expenditure, not an operating expense.
Percentage of time a property sits empty. Industry standard is 5-10% for projections, but varies by market and property type.
Example: A property vacant 2 months per year has a vacancy rate of 16.7%.
Buy, Rehab, Rent, Refinance, Repeat. Investment strategy where investors purchase undervalued properties, renovate them, rent them out, refinance based on new value, and use pulled equity for next purchase.
Example: Buy for $150k, rehab for $30k, refinance at $250k ARV, pull out capital to repeat.
Living in a property while renting out other portions to offset or eliminate housing costs. Common approaches: living in one unit of a multifamily, renting bedrooms, or renting ADU.
Example: Buy a duplex, live in one unit, rent the other to cover most or all of your mortgage.
Investment strategy focused on acquiring properties with opportunity to increase value through improvements, better management, or repositioning. Goal is to force appreciation beyond market rates.
Example: Purchase below-market property, renovate units, raise rents to market rate, increase property value.
Fully renovated, tenant-occupied rental property sold ready to generate income immediately. Often marketed to out-of-state or passive investors.
Example: Renovated single-family home with tenant in place paying market rent.
Property quality classification. Class A: Newest, best locations, highest rents. Class B: Good condition, middle-income areas. Class C: Older, working-class areas, lower rents. Class D: Significant deferred maintenance, high-risk areas.
Example: Class A: Luxury apartments in downtown. Class C: 1970s apartments in working-class suburb.
Financial projection showing expected income and expenses. Often provided by sellers but should be verified during due diligence as projections may be optimistic.
Example: Seller's pro forma shows $60k annual income, but actual rent roll only supports $52k.
Recently sold properties similar in size, condition, and location used to estimate market value. Essential for residential appraisals and investment analysis.
Example: Three similar homes sold for $285k, $295k, $290k; suggests your property worth ~$290k.
Estimated value of a property after renovations are completed. Critical for calculating maximum purchase price on rehab projects and BRRRR investments.
Example: Distressed property currently worth $150k with ARV of $250k after $30k renovation.
Guideline for fix-and-flip investors: Maximum purchase price should be 70% of ARV minus repair costs. Ensures adequate profit margin.
Example: ARV of $300k minus $40k repairs = $260k × 70% = $182k maximum purchase price.
Net income remaining after all expenses including debt service. Positive cash flow means the property generates more income than expenses; negative means expenses exceed income.
Example: Monthly rent of $2,000 minus $1,800 total expenses (including mortgage) = $200 positive cash flow.
Increase in property value over time. Can be natural (market appreciation) or forced (improvements). Average historical appreciation is 3-4% annually but varies significantly by market.
Example: Property purchased for $200k worth $230k after 5 years shows 15% total appreciation.
Property value minus outstanding loan balance. Builds through appreciation and loan paydown (amortization).
Example: $300k property value minus $200k loan balance equals $100k equity.
Using borrowed money to purchase property, amplifying potential returns (and risks). Most real estate investments use leverage through mortgages.
Example: 20% down payment means you control 100% of property with only 20% cash, leveraging 80%.
Document listing all tenants, unit numbers, lease terms, rent amounts, and deposit information. Essential due diligence document for rental property purchases.
Example: Rent roll shows Unit 1: John Smith, $1,200/mo, lease expires 6/30/25, $1,200 deposit.
Total vacancy including physical vacancy plus credit losses (unpaid rent). More accurate than physical vacancy alone for financial planning.
Example: 1 month physical vacancy + $2,000 uncollected rent = higher economic vacancy than physical alone.
Current rental rate achievable in the market for a specific property type and location. Determined by analyzing comparable rentals.
Example: Comparable 2-bedroom apartments rent for $1,400-$1,500; market rent is approximately $1,450.
Property operating at or near full occupancy with established cash flow. Minimal deferred maintenance and predictable expenses.
Example: 10-unit building with 9 units occupied at market rent and no major repairs needed.
Investigation and analysis process before purchasing property. Includes inspections, financial review, legal review, and market research to identify risks.
Example: 30-day due diligence period to inspect property, review leases, analyze finances, and verify seller claims.
Loan provided by property seller instead of bank. Seller acts as lender, receiving payments over time. Can enable deals when traditional financing isn't available.
Example: Buy $250k property with $50k down, seller finances $200k at 6% over 20 years.
Short-term, asset-based loan with higher interest rates (9-15%). Used for fix-and-flip or BRRRR before permanent financing. Based on property value, not borrower creditworthiness.
Example: 12-month hard money loan at 12% interest to purchase and renovate before refinancing.
Use TenantDash to analyze deals, calculate these metrics automatically, and make data-driven investment decisions.
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