Glossary

Accredited Investor

An accredited investor is a term used by the U.S. Securities and Exchange Commission (SEC) under Rule 501 of Regulation D.

Appraisal

A process of developing an opinion of value for real property. In order to be a valid appraisal, the authorized person will have a designation from a regulatory body governing the jurisdiction the appraiser operates within. Appraisals usually take one of three approaches to value: (i) cost approach, (ii) sales comparison approach and (iii) income approach.

Appreciation / Home Price Appreciation (HPA)

An increase in the value of a home or property over time. The increase can occur for a number of reasons including increased demand or weakening supply, or as a result of changes in inflation or interest rates. This is the opposite of depreciation, which is a decrease over time. The Annual Home Price Appreciation, or HPA is the increase in value of a property over the course of a year.

Basis Point

A basis point (bps) is a unit that is equal to 1/100th of 1%, in other words one basis point is equal to 0.01%, similarly a 1% change is equal to a 100 basis point change.

BPO Merge

A BPO is completed by three qualified agents to develop independent price opinions and merge it into the most probable price for the subject property. Each agent is scored on how well they chose comparables to the subject and the score is used to fuel advanced algorithms. The resulting MergeValue™ provides the most likely price for your subject property. (BPO Merge takes it one step further by providing a MergeValue™ Confidence Score that not only reflects agent consensus, but also whether the provided MLS comparables support MergeValue™ price determination.)

Broker Price Opinion (BPO)

A valuation report used by investors, lenders, and real estate agents to value a property. The valuation analysis is performed by a local licensed real estate agent and takes into consideration the condition of the home and the local market activity (comparables).

CAGR

The compound annual growth rate (CAGR) is a useful measure of growth over multiple time periods. It can be thought of as the growth rate that gets you from the initial investment value to the ending investment value if you assume that the investment has been compounding over the time period.

Capital Expenditures (CAPEX)

Capital Expenditures are generally related to material improvements or upgrades to a property such as new appliances, roof or upgrades to existing facilities as these acquisitions will have a useful benefit beyond the current tax year. CAPEX does not include Repair and Maintenance (R&M) expenses.

Capitalization Rate (Cap Rate)

Ratio of Net Operating income from a property to its market value, expressed as a percentage. This rate is used in comparing rate of return from a property with the rate of return from alternative investments.

Cash Flow

The cash flow (before tax) is the net result of gross income minus Operating Expenses and Capital Expenditures. If cash flow is negative it means dollars are going into the investment, and if cash flow is positive it means dollars are coming out of the investment.

Cash-on-Cash Return

A rate of return often used in real estate transactions. The calculation measures the ratio between the annual cash flow relative to the cash invested. For example, when you purchase a rental property, you might put down 20% for a cash down payment. Cash-on-cash return would measure the annual return you made on the property in relation to the down payment.

Clear Title

A clear title is a title without any kind of material lien or levy from creditors or other parties and poses no question as to legal ownership.

Closing Costs

The expenses, over and above the price of the property, that buyers and sellers normally incur to complete a real estate transaction. Potential costs incurred include loan origination fees, discount points, appraisal fees, title searches, title insurance, surveys, taxes, deed-recording fees and other charges.

Diligence

An investigation of the property by the Buyer prior to making a commitment to buy. Diligence on an investment property may include checking title, reviewing an inspection to ascertain the condition of the property, reviewing the lease and tenant information, reviewing valuation estimates, changing various underwriting assumptions, researching the neighborhood and the local real estate market.

Distributions / Dividend

Payments made to investors periodically, typically over the course of a calendar year, from profits.

Down Payment

A down payment is the difference between a home’s purchase price and the amount of the mortgage against the property. The down payment must be paid upfront before the home purchase can close.

Equity

The value of ownership built up in a home or property that represents the current market value of the house less any remaining mortgage balance. This value can build up over time as the property owner pays off the mortgage and the market value of the property appreciates.

Escrow Agent

An entity that has fiduciary responsibilities in the transfer of property from one party to another. The escrow agent will prepare closing documents and examine documents to make sure that the terms of the sale are met on each end, serving both the buyer and seller in the transaction.

Fund Manager

An individual or firm in charge of selecting the real estate assets contained within a fund.

Gross Yield

The gross yield is the yield on an investment before the deduction of taxes and expenses. Gross yield is expressed in percentage terms. In real estate, it is calculated as the annual rental income on an investment property to taxes and expenses divided by the current price of the property.

Home Inspection

An examination of a real estate property’s condition, usually performed in connection with the property’s sale. A home inspector can assess the condition of a property’s roof, foundation, heating and cooling systems, plumbing, electrical work, water and sewage, and some fire and safety issues. In addition, the home inspector will look for evidence of insect, water or fire damage, or any other issue that may affect the value of the property.

Home Owners Association (HOA)

An organization in a subdivision, planned community or condominium that makes and enforces rules for the properties in its jurisdiction. Properties that are in an association have monthly, quarterly or annual HOA fees which are used to provide or maintain common amenities like sidewalks and neighborhood parks.

Income Property

Property bought or developed to earn income through rental income or home price appreciation. Income property can be residential or commercial. Residential income property is commonly referred to as “non-owner occupied.”

Insurance (Landlord or Property Insurance)

An insurance policy that includes coverage for a comprehensive list of causes of loss and replacement cost settlement. Landlord policies sometimes provide coverage for lost rent in the event a covered loss occurs.

Internal Rate of Return (IRR)

An IRR is a commonly-used measure which reflects the annualized expected return on an investment. The IRR is the discount rate that makes the net present value (NPV) of all cash flows from a particular project equal to zero. IRR calculations rely on the same formula as NPV does.

Investment Property

A real estate property that has been purchased with the intention of earning a return on the property, either through rent (income), the future resale of the property, or both. An investment property can be a long-term endeavor, such as a Single-Family Rental home, or a short-term investment in the case of flipping (where a property is bought, remodeled or renovated, and sold at a profit).

K-1

A tax document used to report the incomes, losses and dividends of a business’s partners or S corporation’s shareholders. Rather than being a financial summary for the entire group, the Schedule K-1 document is prepared for each partner or shareholder individually.

Lease

A contract in which, for a rent payment, the one entitled to the possession of the real property (lessor) transfers those rights to another (lessee) for a specified period of time.

Leveraged Return

The use of various financial instruments or borrowed capital, such as a loan, to increase the potential return of an investment.

Loan-to-Value

A lending risk assessment ratio that financial institutions and others lenders examine before approving a mortgage. The LTV is calculated by dividing the amount of the loan by the value of the property. Typically, assessments with high LTV ratios are generally seen as higher risk and, therefore, if the mortgage is accepted, the loan will generally cost the borrower more to borrow (reflected as a higher interest rate).

Mortgage Loan

A mortgage loan, also referred to as a mortgage, is used by purchasers of real property to raise funds to buy real estate; or by existing property owners to raise funds for any purpose while putting a lien on the property being mortgaged. Mortgage borrowers can be individuals mortgaging their home or they can be businesses mortgaging commercial property (for example, their own business premises, residential property let to tenants or an investment portfolio).

Net Operating Income (NOI)

A calculation used to analyze real estate investments that generate income. Net operating income equals all revenue from the property minus all reasonably necessary operating expenses.

Non-Recourse Loan

A type of loan that is secured by collateral, including an IRA account.

Operating Expenses

Expenses incurred in the ordinary course of business such as property management fees, leasing commissions, property taxes, insurance, HOA fees, and repair and maintenance items.

Private Equity Fund

A private equity (PE) fund is a collective investment model where money from separate investors is pooled together into a single fund and then used to make investments, most often in various illiquid equity and debt assets.

Property Manager

The person or company responsible for managing the rental properties in exchange for a fee. Property managers oversee the leasing, rent collection, repairing and maintaining of the investment property on behalf of the owner.

Property Taxes

The annual amount paid by a land owner to the local government or the municipal corporation of his area. Property taxes are determined based on the value of the land and any improvements made.

Regulation D

Regulation D permits raises of unlimited amounts from accredited investors without registering a public sale through the SEC, as it’s assumed that accredited investors are financially able to bear the burden of investment decisions without a review by the SEC.

Repair and Maintenance Expense

The costs incurred to bring a property back to an earlier condition or to keep the property operating at its present condition (as opposed to improving the asset). For example, cleaning the gutters, repairing broken appliances or repainting and cleaning in preparation for a new tenant are all considered repair and maintenance expenses.

Retail Investors

Individual investors who buy and sell properties for their personal portfolio and not for another company or organization. Also known as an “individual investor” or “small investor.”

Security Deposit

A monetary deposit given to a landlord to offset the cost of repair in the event of any damage caused by the Tenant. While generally refundable, security deposits can be either refundable or nonrefundable, depending on the terms of the lease. As the name implies, the deposit is intended as a measure of security for the recipient.

Self-Directed IRA

Most IRA custodians only allow approved stocks, bonds, mutual funds and CDs. A truly Self-Directed IRA custodian, such as Equity Trust, allows those types of investments in addition to real estate, notes, private placements, tax lien certificates and much more.

Single-Family Rental (SFR)

A Single-Family Rental home is a detached residence that is rented out to a Tenant as opposed to being owner-occupied.

Term

The lifespan of a given asset or liability.

Title Report & Title Insurance

The written analysis of the status of title to real property, including a property description, names of titleholders and how title is held (joint tenancy, etc.), tax rate, encumbrances (mortgages, liens, deeds of trusts, recorded judgments), and real property taxes due. A title report made when the report is ordered is called a “preliminary report,” or a “prelim,” and at time of recording an up-to-date report is issued which is the final title report. The history of the title is called an “abstract.” A title report is prepared by a title company, an abstractor, attorney, or an escrow company, depending on local practice. Normally a title report’s accuracy is insured by title insurance which will require the insurance company to either correct any error or pay damages resulting from a “cloud on title,” encumbrance or title flaw in the title which was not reported.

Yield

In the context of real estate, yield refers to the annual cash return on the investment, expressed as a percentage of the investment’s initial cost, or less frequently, its estimated current value.