Real Estate Investment Glossary

After-Repair Value (ARV)
An estimate of what the property will be worth after it is repaired and improved, according to a specified budget/plan.
 
Amortization
The process by which loan principal decreases over the life of a loan. As each mortgage payment is made, a portion is applied towards reducing the principal, and another portion is applied towards paying the interest on the loan. For a 30-year amortization loan, payment is designed so that the loan principal is repaid over a 30-year period, assuming a constant debt service payment.
 
Balloon Payment
A loan which does not fully amortize over the term of the note, thus leaving a balance due at maturity. May have a fixed or a floating interest rate.
 
Bridge Loan
A type of short-term loan, typically taken out for a period of two weeks to three years pending the arrangement of larger or longer-term financing.
 
Capital Expenditure (Capex)
Funds spent on upgrades to a physical asset such as property, extending its useful life or otherwise improving it beyond routine repairs and maintenance.
 
Capitalization Rate (Cap Rate)
Used primarily to help establish the value of income properties and expressed as a percentage. Figured by dividing the all-cash purchase price into the net operating income. Example: A $100,000 property with a net operating incoming of $10,000 would have a cap rate of 10 percent.
 
Cash Flow
The income surplus after all operating expenses and debt payments are made.
 
Cash-on-Cash Return
The ratio of annual before-tax cash flow divided by the total amount of cash invested, expressed as a percentage. Cash-on-cash return factors in the use of leverage (or borrowed funds), unlike the cap rate.
 
Cash-Out Refinancing
Occurs when a borrower refinances their mortgage for more than they currently owe to pocket the difference in cash up-front.
 
Debt Service Coverage Ratio (DSCR)
The underwritten net cash flow of the rental properties divided by the scheduled principal and interest payments of the loan.
 
Depreciation
An annual income tax deduction that allows a taxpayer to recover losses associated with wear and tear and deterioration of certain property.
 
Debt Yield
The underwritten net cash flow of the rental properties divided by the loan amount, expressed as a percentage.
 
Equity
The amount of value a property owner possesses as determined by the fair market value of the property minus the amount owed on a mortgage.
 
Escrow Account
An account in which money is held in trust until a transaction is completed (e.g. tenant security deposits).
 
Fixed-Rate Loan
A loan with an interest payment that remains the same for the entire term.
 
Floating-Rate Loan
Floating or variable rate loans have an interest payment that fluctuates over time with a benchmark interest rate (generally LIBOR).
 
Hard Money
A specific type of asset-based loan financing through which a borrower receives funds secured by real property. Typically issued by private investors or companies.
 
Leverage
The use of credit or borrowed funds intended to increase returns on an investment.
 
Lien
A claim one person has on a property belonging to another as a security for a debt or obligation.
 
Loan-to-Cost (LTC)
A ratio comparing the loan amount needed to finance a project to the cost of building the project. Example: If the project cost $1 million to complete and the borrower was asking for $800,000, the loan-to-cost (LTC) ratio would be 80%.
 
Loan-to-Value (LTV)
The loan-to-value (LTV) ratio is the loan amount divided by the value of the property determined through an appraisal of the property, expressed as a percentage.
 
Non-Recourse Loan
A loan secured by the real estate of the borrower and not guaranteed by the owner, except for customary recourse carve-outs or events of default (such as fraud, bankruptcy, certain environmental matters, etc.).
 
Recourse Loan
A loan secured by the real estate of the borrower as well as a full principal guarantee from the guarantor.
 
Special Purpose Entity (SPE)
A newly formed entity (usually a limited liability company or LLC) whose only purpose is to own the real estate collateral and act as the borrower for the real estate loan.
 
Spread/Yield Maintenance
Forms of prepayment fees that are only payable if the borrower elects to repay the loan during the applicable period.
 
Term Loan
The standard commercial loan, often with fixed interest rates, monthly or quarterly repayment schedules, and a set maturity date.
 
Title Insurance
A form of indemnity insurance that insures against financial loss from defects in title to real property


 
 
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