Knowledge is power.
But knowledge comes in the form of language. And if you don’t understand the language of the industry you’re trying to learn about — in this case, real estate investing — you’re not going to get very far.
That’s why we put together this glossary.
Here are 26 of the most important terms for real estate investors to know, definitions, and explanations for why they’re important.
BRRRR
What is it?
The BRRRR method is a real estate investing strategy that stands for “buy, rehab, rent, refinance, repeat.”
The idea is that you purchase a property, fix it up (rehab), rent it out, and then refinance the loan to pull out your initial investment.
You can then use that money to buy another property and repeat the process.
Why is it important?
The BRRRR method is a great way to quickly build up a portfolio of rental properties with minimal cash out of pocket.
Cash-Out Refinance
What is it?
A cash-out refinance is when you take out a new loan to replace an existing mortgage and pull out the equity you’ve built up in your home in the form of cash.
Why is it important?
A cash-out refinance can be a good way to access the equity in your home if you’re looking to make improvements or invest in other property. It can also be a good way to consolidate debt.
Wholesaling
What is it?
Wholesaling is when an investor gets a property under contract (with no money down) and flips the purchase agreement to another real estate investor with cash on-hand. The wholesaler gets paid an assignment fee for finding the deal.
Why is it important?
Wholesaling is a great way to get started in real estate investing without having to put any of your own money down.
Wholetailing
What is it?
Wholetailing is the strategy of buying a property, making minor repairs, and then selling it for a profit on the MLS. The word itself is a combination of “wholesale” and “retail.”
Why is it important?
Wholetailing is a great strategy for beginning investors because it doesn’t require a lot of money or experience.
Equity
What is it?
Put simply, equity is the portion of your property that you actually own.
For example, let’s say you buy a house for $100,000 and put down a $10,000 deposit. The equity in your property would be $10,000.
If the value of the property goes up to $110,000, your equity goes up to $20,000. Equity also increases as you pay off your mortgage.
Why is it important?
As a real estate investor, equity is important for two reasons.
First, it’s what you use as collateral when you borrow money against your property. Second, it’s how you make money when you sell your investment property.
The higher the equity in your property, the more money you can borrow against it and the more money you’ll make when you sell.
Motivated Seller
What is it?
A motivated seller is a person who is looking to sell their property quickly, often for less than the market value. They might be motivated because they need to move for a job, they’re going through a divorce, or they’re trying to avoid foreclosure.
Why is it important?
Investors often market themselves to motivated sellers as someone who can help them sell their home quickly and for cash. This can be a win-win situation — the investor gets a property at a discount, and the seller gets rid of their property without having to go through the hassle (and expense) of listing it with a real estate agent.
Absentee Owner
What is it?
An absentee owner is someone who owns a property but doesn’t live there. They might live in another state or country, or they might just own investment properties in addition to their primary residence.
Why is it important?
Investors often look for absentee owners because they’re more likely to be interested in selling their property quickly, and they might be more negotiable on price.
Distressed Property
What is it?
A distressed property is a home that’s in poor condition, usually as the result of neglect or financial hardship on the part of the owner.
Why is it important?
Because distressed properties can be had for much cheaper than non-distressed properties. They’re also often found in neighborhoods that are up-and-coming, which means they have the potential to appreciate in value over time.
However, it’s important to remember that distressed properties are often in poor condition for a reason. You’ll need to be prepared to put in some work (and money) to get the property into livable condition.
Cash Flow
What is it?
Cash flow is the estimated monthly income generated by an investment property after accounting for expenses like mortgage payments, vacancy, repairs, and property management.
Why is it important?
Because cash flow is what’s going to give you a return on your investment. It’s the money you have left over after all your expenses are paid that you can either reinvest in the property or take out as profit.
Due diligence
What is it?
Due diligence is the process of investigating a property before you buy it, to make sure that it meets your investment criteria.
Why is it important?
Because you don’t want to buy a property without knowing what you’re getting yourself into. Due diligence should include things like getting a home inspection, ordering a title search, and looking into the property’s past to make sure there are no hidden surprises.
Escrow
What is it?
In real estate, an escrow is when a third party (the escrow company) holds and regulates the payment of funds required for two parties during a transaction.
Why is it important?
An escrow account is typically used in situations where large sums of money are exchanged, such as in a home purchase. It protects both the buyer and the seller from fraud or misappropriation of funds.
Assignment Fee
What is it?
An assignment fee is what a wholesaler charges a cash buyer to transfer the purchase agreement of a property to them.
Why is it important?
Wholesalers typically use assignment fees to make a profit without having to put any money down themselves. This allows them to quickly turn around properties and make a profit without actually owning the property.
Closing Costs
What is it?
When you buy a property, there are a number of one-time fees that must be paid in order to finalize the purchase. These include things like loan origination fees, appraisal fees, title insurance, and other miscellaneous expenses.
Why is it important?
Knowing what your closing costs will be ahead of time is critical for budgeting purposes. These costs can sometimes be rolled into the loan, but that will increase the amount you have to borrow and could end up costing you more in interest over time.
MLS
What is it?
The MLS, or Multiple Listing Service, is a database of properties that are for sale by real estate agents.
Why is it important?
The MLS is a great resource for investors because it gives you access to a wide variety of properties that you might not otherwise be able to find.
FSBO
What is it?
FSBO stands for “For Sale By Owner.” This is when a property owner tries to sell their property without going through a real estate agent.
Why is it important?
FSBOs can be good opportunities for investors because the owner is usually motivated to sell quickly and may be willing to negotiate on price.
ARV
What is it?
ARV stands for “after repair value.” It’s what a property is worth once you’ve completed all the necessary repairs and renovations.
Why is it important?
The ARV is important because it’s what you use to determine your maximum purchase price. You don’t want to pay more for a property than it’s ultimately going to be worth.
LTV
What is it?
LTV, or loan-to-value ratio, is the percentage of a property’s value that is being financed by a loan.
For example, if you’re buying a $100,000 property with a $20,000 down payment, your LTV would be 80%.
Why is it important?
The lower the LTV, the less risk involved for the lender. That’s why properties with lower LTVs tend to get better loan terms.
Appreciation
What is it?
Appreciation is an increase in the value of a property due to market conditions or other factors.
Why is it important?
Appreciation is one of the primary ways that investors make money in real estate. By buying a property and holding on to it for a period of time, they can sell it later at a higher price and pocket the difference.
Private Money
What is it?
Private money is funds that come from private investors, rather than financial institutions like banks.
Why is it important?
Private money can be a great way to finance your real estate investments, because you may be able to get better terms than you would from a bank, including a higher loan-to-value ratio and a lower interest rate.
Hard Money
What is it?
Hard money is a type of financing that comes from private investors or companies, rather than traditional lending sources like banks.
Why is it important?
Hard money loans are typically easier to qualify for than bank loans, and they can be used for a variety of purposes, including purchasing property, renovating a property, or even flipping a property.
Cap Rate
What is it?
The capitalization rate, or “cap rate,” is a measure of an investment property’s expected rate of return. It’s calculated by dividing the net operating income (NOI) by the purchase price or current market value.
Why is it important?
Because the cap rate is a quick way to compare properties side-by-side to see which one might be the better investment. A higher cap rate means a higher return on investment, and vice versa.
Off-Market Property
What is it?
An off-market property is a piece of real estate that’s not being actively marketed for sale.
Why is it important?
Investors often have the best chance of finding good deals on properties that are off-market. That’s because the owner may be more motivated to sell quickly and for less than the market value, since they’re not actively trying to sell.
To find off-market properties, you’ll need to network with other investors, real estate agents, and property management companies.
Earnest Money
What is it?
Earnest money is a deposit that a buyer makes to show that they’re serious about buying a property.
Why is it important?
If you make an offer on a property and it’s accepted, you’ll usually have to put down earnest money. The amount varies, but it’s typically 1-3% of the purchase price.
If you back out of the deal for any reason other than what’s outlined in the contract, you’ll usually forfeit your earnest money.
70% Rule
What is it?
The 70% rule is a guideline that investors use to help them estimate the maximum price they should pay for a property.
Why is it important?
The 70% rule says that an investor should never pay more than 70% of the after-repair value (ARV) of a property, minus the cost of repairs. The ARV is the estimated market value of a property once all repairs have been made.
This rule is a good way to make sure you don’t overpay for a property, which could lead to financial trouble down the road.
Amortization
What is it?
Amortization is the process of spreading out a loan into equal payments over its life span.
Why is it important?
As a real estate investor, you’ll likely take out loans to finance your properties. Amortization ensures that you’ll be able to make those payments in manageable chunks, rather than one large lump sum.
Short Sale
What is it?
A short sale is a real estate transaction for the purchase of a property where the proceeds from the sale are insufficient to pay off the existing mortgage debt.
Why is it important?
Short sales can be great opportunities for investors to get properties at a discount, but they can also be time-consuming and difficult to close.
Final Thoughts
Now that you know some of the most important real estate investing terms, you’re one step closer to becoming a successful investor yourself.
But remember, knowledge is only part of the equation. You also need to take action and put what you’ve learned into practice.
So get out there and start investing!