A B C D E F G H I J L M N O P S T U V W Y
1% Rule: - The gross monthly rental income should be 1% or more of the purchase price, after rehab or repairs. Some investors use a 2% or 3% Rule. The higher the percentage, the better it is.
50% Rule: - One-half of the gross income generated by a rental property should be allocated towards operating expenses when determining profitability. The rest is to pay debt service (mortgage). The rule was created to help investors cushion any errors in estimating actual expenses and income
70% Rule: - This is rule is for buying and flipping properties for a profit. Basically, the purchase price of the property should be 70% or less of the after-repair value (ARV) minus repair expenses (rehab)
Acreage - A big section of land prior to being divided into smaller portions for residential, commercial, or agricultural use. An acre measures 43,560 square feet
Acquisition Cost - The total cost of buying an investment property, including closing costs, fees for inspections, mortgage, settlement, etc.
Adjustable Rate Mortgage - A mortgage where the interest rate adjusts up or down usually every six or twelve months beginning after 1, 3, 5, 7 or 10 years and based on a specific index and margin. It is also known as a variable rate mortgage
Adjusted Gross Income - Gross income of a building if fully rented, less an allowance for estimated vacancies
ADU - Accessory Dwelling Unit: A small independent residential unit located on the same lot as a detached single-family home or duplex. Certain states have rules and regulations governing the maximum size and height allowed.
After Repair Value - (ARV). The estimated market value of a property after its rehab or renovation is complete
Amortization: The principal and interest on a loan through regularly scheduled payments
Annual Percentage Rate (APR) - This is the actual interest rate your loan would be only for the first year if you included all of the other associated costs such as closing costs and points
Appraisal: An estimate of the value of a property, made by a licensed professional known as an appraiser
Balloon (Payment) Mortgage - Usually a short-term fixed-rate loan which involves small payments for a certain period of time and one large payment for the remaining principal balance, due at a time specified in the contract
BRRRR - BRRRR is an acronym for Buy, Rehab, Rent, Refinance, Repeat. Using this real estate investing method, Investors buy properties to renovate for the purpose of renting them out. Once the renovations show much better appreciation, they do a cash-out refinance to buy another property.
Borrowing Entity Type - the legal method under which property is owned such as by an individual, corporation, LLC, partnership, or a trust
Bridge Loan - A short-term equity based loan ranging from six months to one year for borrowers who need the funds quickly without the hassles of traditional financing paperwork and qualifying. Also known as a swing loan.
Building Permit - A document issued by government regulatory authority that allows a builder to construct or modify a structure
Buydown - The process of paying additional lender points on the loan to reduce the monthly mortgage payment. There are typically two specific types: a Permanent Buydown, and a Temporary Buydown. In a Permanent Buydown, a sufficient amount of interest is prepaid to lower the rate permanently. In a Temporary Buydown, only a sufficient interest is paid to lower the payment for the first three years. The reason to Temporarily Buydown, a loan is to lower the current payments thereby more easily qualifying for the loan. This usually makes sense because income will usually continue to increase as the interest does. The most common Temporary Buydown is called 3-2-1, meaning three percent lower the first year, tow percent lower the second year, and one percent lower the third year.
Cap: The maximum which an adjustable-rate mortgage may increase, regardless of changes in the index. An interest rate cap determines how much the interest can change, while a payment cap limits the increase in monthly payment to a specific dollar amount.
Cap Rate: A net yield set by an investor to determine the value of an income producing property. Cap Rate = NOI ÷ purchase price
Capitalization Rate: A rate of return of a rental property based on dividing the yearly net operating income (NOI) by the purchase price or market value.
Cash Flow - The amount of money moving in and out of an investment property or any other cash-generating asset.
Cash on Cash Return - (COC) The annual return you receive on your invested funds. Let's say you have a tenant paying you $3,000 a month and your monthly operating expenses are $600, then your annual pre-tax cash flow is $28,800: ($3,000 - $600) x 12 months. If you divide that by the amount of cash invested ($75,000) it means your cash-on-cash return is 38%, 28,800/75,000
Cash-Out Refinancing - When the newly proposed mortgage in a refinance has a principal loan amount higher than the balance of the current mortgage being refinanced, and the excess funds are greater than $2,000. Many BRRRR investors use a cash out refinance with a no-doc loan since you only need six months to realize the new value from the rehab.
Closing Costs: The cost and fees associated with the legal change in ownership of the property and with securing a mortgage loan, that are assessed at the closing or settlement
Comparative Market Analysis: An estimate of the value of a property based on an analysis of sales of properties with similar characteristics
Construction Loan - A short term loan to fund the construction of a residential dwelling. These loans are generally have periodic disbursements to the builder as soon as each stage of construction is completed. Once construction is completed a take-out or permanent loan is used to fully repay the construction loan
Contingency Offer - A clause or condition in the purchase agreement that must be satisfied before the purchase agreement can be fully and legally satisfied
Credit Report: A report of your existing credit history by one of the 3 credit bureaus (Experian, Equifax, Transunion) to determine if, and the number of times, you may have been delinquent making monthly payments on previous debts. Even when a credit report is largely positive, many lenders will still require written explanation for any negative accpunt history within the credit report.
Credit Score - A three-digit numerical score, usually from Fair Isaac, which represents an estimate of an individual's financial creditworthiness. It is based on the information in an individual's credit report. Lenders such as banks and credit card companies use credit scores to determine maximum credit limits and interest rates
Debt Service Coverage Ratio (DSCR): A 1.0 means the property's income pays for the debt service. The ratio is calculated by taking the net operating income and dividing it by the mortgage payments (debt service). Most lenders look for a ratio of 1.25 or higher on 5 or more unit buildings.
Debt Service:The payments (principal and interest) made on a loan
Depreciation - The method of taking a value deduction on your tax returns for a property over its lifetime. It also means the reduction of property value as a result of wear and tear, age, or obsolescence over its lifetime.
Earnest Money Deposit - A deposit made by the real estate buyer(s) to support their honesty of completing the transaction. Also called an EMD
Effective Gross Income - The gross income of a building if fully rented, minus an allowance for estimated vacancies
Environmental Report: Report generated by an qualified environmental firm to determine potential environmental hazards in a building's region or within the building itself
Equity: 1.The difference between the fair market value and current indebtedness, also referred to as "owner's interest". 2. The difference between the amount owed on the loan and the current purchase price of the home or property
Escrow: 1. A special account set up by the lender in which money is held to pay for future property taxes and insurance. 2. A third party who carries out the instructions of both the buyer and seller to handle the documents at the settlement
F
air Market Value: An appraisal term for the price which a property would bring in a competitive market, given a willing seller and willing buyer, each having a reasonable knowledge of all pertinent facts, with neither being under any compulsion to buy and sell.Fannie Mae: A congressionally chartered corporation which buys mortgages on the secondary market from Banks, Savings & Loans, Etc; pools them and sells them as mortgage-backed securities to investors on the open market. Monthly principal and interest payments are guaranteed by FNMA but not by the U.S. Government
FHA: Federal Housing Administration, a government agency that insures the mortgage on 1-to-4 unit properties used as a primary residence.
Fixed Rate Mortgage: A mortgage with an interest rate that remains unchanged for the loan's life cycle. The most common fixed-rate mortgage is repaid over a period of 30 years; 15-year fixed-rate mortgage are also available.
Flipping - The process of buying a property, fixing it up or renovating it to increase its market value, and selling it for a profit all within 5 to 6 months. Our loan product page has details about short term investor flip loans and the lender's requirements.
Floor rate: The lowest possible interest rate an ARM loan may decline to or the initial rate according to the note.
Foreclosure: The legal process by which a lender takes back a property on which the borrower defaulted making payments. A servicer may take over a property from a borrower on half of a lender. A property usually goes in to the process of foreclosure if payments are greater than 90 days over due
Freddie Mac (Federal Home Loan Mortgage Corporation): A government entity which buys conforming loans from conventional lenders and packages them for sale to investors as securities
General Partnership - in a partnership n which two or more individuals or persons conduct business as partners; each partner’s liability is not limited and offers riskier asset protection that even a sole proprietor
Gross Income: Total income, before deducting taxes and expenses. The total income, either actual or estimated is from an income producing property
Gross Rent Multiplier (GRM) - The rate of return of a rental property. It is derived from dividing the purchase price or market value by the annual gross rent
H
ard Money: High interest rate financing completed quickly usually within 3-10 days based more on equity when conventional financing may not be availableHolding Period - The number of months you expect it will take you to rehab a property and either sell or rent it. Flippers sell it while BRRRR investor rents it.
Interest - the fee paid for borrowing money, which pays the lender’s costs of doing business
Lessee - tenant in a rental property
Limited Liability Company (LLC) - the restriction of one’s potential losses to the amount invested. An entity that avoids personal liability.
Limited Partnership - one in which there is at least one partner who is passive and limits liability to the amount invested, and at least one partner whose liability extends beyond monetary investment
Line of Credit: An arrangement in which a bank or lender extends a specified amount of unsecured credit to a particular borrower for a specific time period
Loan Processing Fee: The fee charged by a lender, to prepare all the documents associated with your mortgage
Lot Size - The total square footage of the land
LTC Loan to Cost: A ratio used by lenders to asses risk and approving a loan for an investor. It is calculated by dividing the loan amount by the purchase price and rehab costs. For example, say you buy a property for $200,000 and plan to put another $125,000 into it, for a total cost of $325,000. If you take out a loan for $240,000, that ends up being a LTC of 73%.
LTV: Loan to Value: This is calculated as the proposed loan amount divided by the market value of the property
Mixed Use - A real estate property that is zoned for both residential and commercial use and complementary to the neighborhood. An example would include a building with a small retail shop or restaurant on the bottom floor and rental units on the second floor.
Mortgage Banker: An entity that makes loans with its own money and then sells the loan to other lenders
Mortgage Broker: An entity that arranges loans for borrowers through its wholesale lending partners
Net Operating Income (NOI) - The total income minus operating expenses, adjustments, etc., before factoring in debt service (mortgage payments), property taxes, and property insurance.
Non-QM - A mortgage that is tailor made for borrowers who have inconsistent or non-traditional income, a major credit event or high debt to income ratios. Due to added risk, interest rates are usually higher than conventional rates by 1-3% depending on the overall risk profile. The bank statement, P&L only, 1099 and DSCR loans are the most popular types of non-QM loans.
Non-Recourse - A mortgage or deed of trust securing a note without recourse allows the lender to only get the security (subject real property) for repayment in the event of default, and the borrower is not personally liable. This type of loan does not allow a deficiency judgment.
Operating Expense: Periodic expenses necessary to the operation and maintenance of an enterprise (e.g., taxes, salaries, insurance, maintenance). Often used as a basis for rent increases.
Operating Lease - from a financial reporting perspective, a lease that allows the use of equipment or asset but does not transfer ownership rights
Origination Fee - A fee paid at closing to the mortgage company or lender to obtain a mortgage for a residential investor
Permanent Take-Out Loan - long-term financing that typically replaces short-term construction or bridge financing once the project is completed
PITI: Principal, interest, taxes and insurance. Your calculated estimate of monthly payments based on the loan's number of years
Points: Loans fee paid by the borrower. One point is 1% of the loan amount. The same as an origination fee
Prepayment Penalty: A fee for paying off a loan early before it is due. Most non-qm investment property loans include a prepay penalty of six months mortgage interest if the loan is repaid within 6 months or 12 months. Almost all fix and flip, BRRR, and bridge loans do not have a prepay penalty.
Pre-qualification: The process of determining the amount of money a particular lender will let you borrow. You should strive to obtain pre-qualification with at least two or three lenders
Prime Rate: An artificial rate set by commercial bankers. Many banks will use the Wall Street Prime rate. This is a rate set by the top lending banks in the country
Principal: The amount of debt (loan balance), not including interest, remaining on a loan
Pro Forma - (from Latin pro forma, "according to form") financial statements showing what is projected to occur in the next 1-5 yearsProperty Tax: Taxes based on the market value of a property. Property taxes vary from state to state and county to county
Refinance: The restructuring of an existing loan's interest rate and terms by the same borrower.
Renovation - remodel an existing building which may include structure updating to modern style and functionality
Rent Comparable Analysis - An analyses of similar properties located near your rental property to determine the market rents for your property usually performed by a licensed appraiser for a DSCR loan
Rent Roll - A list of tenants leasing a property, which detail the lease terms, unit size, and the rental amount
Replacement Reserves: Monthly deposits that a lender may require to be set aside for the replacement of major building components such as roofing, HVAC, mechanical equipment, carpets, roof, etc
Reserve Funds: - The amount of liquid funds an investor has in their bank and investment accounts. Lenders requiremnts vary widelly from zero months to 12 months for a specific property and loan type.
Return on Investment: (ROI) - The percentage of invested money that's returned to the investor after subtracting out all expenses and costs. ROI = (current investment property income – the investment cost) divided by the total investment cost.
Example for a financed property: $15,000 (annual cash flow) ÷ $120,000 (down payment + rehab costs) = 0.115 or 12.5% ROI
Second Mortgage: - A mortgage on real estate which already has a first mortgage or senior lien. The second mortgage carries similar rights as the first mortgage but are subordinate to those of the first
Seller Concessions: - An agreement usually in a signed purchase agreement whereby certain closing costs will be paid by the seller
Short Term Rental (STR) - This is a type of property that is leased out for very short periods of time from one day to as much as 90 days, primarily through online plat forms such as Airbnb or VRBO as well as local property management companies. The properties are hotel alternatives and are furnished with listed amenities. Many DSCR investors are converting their long term rental properties into a short term fo more profits.
Squatter - A person(s) who individually decides to illegally occupy a dwelling without the owner’s consent. Essentially, an unauthorized occupant costing you a tenant or lessee.
Tax & Insurance Impound: Monthly deposits that a lender may require to be included with principal and interest payments for the payment of taxes and insurance
Title: The actual recorded legal document confirming ownership of a piece of real estate
Title Insurance: An insurance policy which insures you against errors in the title search - essentially guaranteeing the financial interest in the property for you and your lender
Total Annual Operating Income - total annual income minus operating expenses, but before mortgage payments, tenant improvements and leasing commissions are taken outUnderwriting: The process of deciding whether to make a loan based on credit, property income and expenses, assets and/or other criteria
Underwriter: The underwriter is the lender or company who actually provides the funds for your loan. A mortgage broker "brokers" and represents several different underwriters and depending on your situation they choose the "best" underwriter for you and your lender
Vacancy Rate - unoccupied units as a percentage of the total number that tend to be vacant for the property or the area.
For example, if your rental property is consistently vacant during "3" summer months over a two-year period, it has a vacancy rate of 12.5% (3 months ÷ 24 months = .125)
Value Add - Investors may add value by renovating the property, by construcing an ADU or some other property upgrade. House Flippers always have a value-add profit strategy as do BRRRR investors.