30 Must-Know Terms to Talk Like a Pro

My formal education and current career are both in the healthcare field. 

Most would assume that a background as a healthcare professional would do little to prepare me for the world of real estate investing (they'd mostly be right). 

There is one area though that they have more in common than one might think... What is that one area you ask??? 

Jargon! 

Just when I thought I had learned and memorized every acronym there was to know, I started getting interested in real estate. 

I'm not sure which field is worse, but whether its ARV (After Repair Value) or PT INR (prothrombin time international normalized ratio) you can rest assured that you'll stick out like a sore thumb without knowing the proper lingo. 

So, let's put on our white coats and learn how to hang with the best of them with 30 Must-Know Terms to talk like a pro.

30 Must-Know Terms to Talk Like a Pro

• NOI: Net operating Income. 

Rental income minus all expenses except for your mortgage payment. These expenses include property taxes, insurance premiums, repairs, capex, vacancy, and management fees.

• RV Ratio: Rent to Value Ratio. 

This one can be a very powerful screening tool for potential rental properties, and is the basis of the "1% and 2% rules". An example of a property that displays a 1% rent to value ratio would be a 100,000 dollar house that rents for 1,000/month. The same house would display a 1.5% rent to value ratio if it rented for 1,500 dollars per month. 

The general rule of thumb used to be that your rental properties should display a 2% rent to value ratio, hence "the 2% rule". More often than not though we are now hearing about the "1% rule". This is due to the increased difficulty of obtaining a 2% RV ratio on rental property due to rising purchase prices across the country. These 'rules' are simply a test people use to screen properties and quickly determine if they might be a good deal. It is only a rough estimate, and it is important for you to run all of the numbers before purchasing a property. 

• CAP Rate: Capitilization Rate

Cap Rate is the NOI of a particular property divided by its purchase price. So if a property generates 100,000 dollars after all non mortgage operating expenses, and is listed for sale for 1 million dollars, its cap rate is 10% (100,000/1,000,000). This metric is an incredibly important tool for multifamily property. The reason being that commercial multifamily (5+ units) is valued using an income approach instead of a comparison approach like single family homes. 

For example, let's say there is a 100 unit apartment complex that has an NOI of 100,000 dollars. Let's also say that most buildings in that area sell for an 8 cap (8% capitalization rate). That means that this building could reasonably sell for 1.25 million. This is because 100,000 is 8% of 1.25 million. 

Let's add something to this example... Let's now say that this same apartment complex that has an NOI of 100k is only 50% occupied by tenants. Maybe the current owners aren't marketing correctly or the building needs some minor cosmetic repairs. 

You could buy the property for 1.25 million... do some minor cosmetic work, market the vacant units, and boom! Your NOI is now 150,000 because you've increased the occupancy rate. That means the new potential sales price is 1,875,000 using the same cap rate.

That's the power of commercial multifamily investing and cap rates!

• CoC%: Cash on Cash Return

Yearly cashflow divided by the initial amount of cash you invested. So it is quite literally the cash return you make on the cash that you used to buy the property. Cash on Cash! Remember though, this is only one aspect of how rental properties make you money. 

• LTV%: Loan to Value Ratio

Mortgage amount divided by appraised value of the property. So if you buy a 100k dollar house and put down 20k (20%) your LTV is 80%.

• ARV: After Repair Value

Exactly what it sounds like. The value of a home after it has been remodeled/rehabbed/repaired. You will often hear that potential flip properties should be purchased at 70% ARV-expenses. So if the ARV of a house is 100k and needs 25k worth of work, it should be purchased by the investor at (100 x .7)= 70k minus expenses (25k)= 45k ideal purchase price. 

• "Under Contract"

This phrase simply means that a seller has accepted an offer from the buyer and a purchase contract has been signed. It doesn't mean the house has technically sold, rather it has entered an escrow period during which an inspection will take place, an appraisal will be done, insurance will be obtained, etc. 

• SFR/MFR: Single Family Residence/Multifamily Residence

A single family residence is just a regular ol' home. A multifamily could be a duplex, triplex, or 4plex (quad) which would be a building with 2, 3, and 4 units respectively. Buildings with more than 4 units are sometimes referred to as commercial multifamily properties, because they are treated differently for lending purposes and require a commercial mortgage. 

• Turnkey:

This one is tough to define because it is used rather loosely and can refer to a variety of things. Generally speaking though a turnkey rental is a property being marketed for sale by a turnkey provider to an investor seeking a passive investment. The turnkey provider purchases the home at a discount, rehabs the home, places a tenant, then markets it for sale to an investor. The turnkey provider typically provides management for the property as well. 

• Debt Coverage Ratio:

DCR can be calculated by  determining the Net Operating Income and then dividing it by your debt service. Remember that NOI is Rent minus all non mortgage expenses. Debt service is your mortgage payment. 

So lets say your rent is 1000 and your non mortgage expenses are 500 and your mortgage payment is 500. This means that your debt coverage ratio is exactly 1. In order to generate a profit, your debt coverage ratio will need to be greater than 1. If it is less than 1, you will be operating at a loss. 

• Depreciation/Appreciation

Appreciation simply means going up in value, while depreciation means going down in value. In real estate however, the terms are used a bit differently. 

Over time, real estate goes up in value, or appreciates. So far that's the same. However when people talk about real estate depreciating, they usually aren't talking about the real estate decreasing in price. They're talking about the ability to say that your house is depreciating for tax purposes, even if the house actually went up in value. It's a strange loophole that makes residential real estate a great tax favored asset class.

• OOS: Out of State.

Investors living in high acquisition cost markets like the West coast and the Northeast, may choose to invest OOS to obtain a better ROI. 

• DTI: Debt to Income Ratio

This metric helps a lender determine if they can lend to you by seeing how much of your income goes towards debt payments. There are two types of DTI (front end and back end) but generally speaking this ratio simply helps a lender determine if you are a good candidate for a mortgage. For example I was speaking to my lender yesterday and he told me they can lend up to a 50% Back end DTI. This means that I can get a mortgage through him if less than 50% of my gross income goes towards housing expenses and recurring debt payments like credit cards and student loans. 

• ROI: Return on Investment

Okay, maybe I should have put this one higher up the list! ROI simply refers to the total return on your initial cash investment. Remember, Cash on Cash is simply your return from cashflow. ROI can include things like appreciation, and principal reduction as well. 

• Escrow:

Escrow is like purgatory for the seller's home and the buyer's money once an offer is accepted. Escrow is typically 30-45 days in length and begins once a purchase agreement is signed and an earnest money deposit is wired to your title company. This earnest money stays in the account until the close of escrow at which point it is applied to the purchase. Escrow closes at the end of 30-45 days once all closing docs are signed and the cash to close is wired to the title company. 

• Amortization:

This refers to the amount of time a loan is to be repaid. Typically mortgages are amortized over thirty years. If you have a moment, take a look at an amortization calendar for a 30 yr. loan. You might be surprised to see how much of your loan goes towards interest during the first few years, but if you jump down to year 20, you can see how much goes to principal reduction. 

You may have heard of a loan amortization with a balloon payment. For example.... 20 yr amortized loan with a 7 year balloon payment. This means that the loan is repaid like a 20 yr mortgage, but the entire unpaid balance is due at yr 7. 

If you look closely at the word amortized (mortgage as well) you might find the root word mort. The same root word in mortuary, rigamortis, mortal, postmortem, etc. This word technically means "death". Although that may seem ominous, it actually refers to the "killing" of your loan. If your loan has a 30 yr. amortization, that means it takes 30 years to "kill". 

• Conventional/Portfolio/Commercial/Hard money lenders

Oh boy... there's a lot to unpack here. All of these are different types of lenders/funding sources for the acquisition of rental property. Each has it's own requirements, pros, and cons. 

Generally speaking, when we say conventional loans we are referring to conforming conventional loans that "conform" to Fannie Mae and Freddie Mac guidelines. These are your standard loans requiring 20-25% down with very competitive interest rates. 

Due to restrictions on conventional loans such as DTI requirements, high down payment, and a 10 conventional mortgage cap, some investors seek out portfolio lenders. These are lender who can loan you property using the equity in your existing portfolio of homes as collateral. 

A hard money lender is a non traditional source of funds. It is not a bank, but rather an alternative source of funds. That said they are usually still licensed in some way to lend money. A private money lender is simply someone looking to loan money and make a return. This could be a friend, family member, or any person looking to lend to real estate investors. 

• Pro Forma:

Simply refers to the manner in which financial results are calculated. In real estate investing pro formas are usually made for potential property purchases by the prospective buyer using as accurate of information as can be gathered at the time. A pro forma will include gross rent and all of the expenses laid out in a structured, organized fashion. You will most likely see a cashflow figure, a cash on cash return, ROI, cap rate, etc.

• Points:

Points, sometimes referred to as discount points or mortgage points, refers to your ability to buy down your interest rate when you purchase a property. One point costs 1 percent of your mortgage amount (or $1,000 for every $100,000 in purchase price.). So, as a buyer, you can pay to lower your interest rate. It is up to you to figure out if it's worth it to you to do so. 

• Cap Ex:

This refers to big ticket items that need to be replaced at regular intervals on a rental property. Cap Ex is usually a budgeted expense category you use when estimating expenses for a potential purchase.

• PM: Property Management

Someone has to manage your rental property. Someone needs to collect rent, arrange for repairs, renew leases, etc. This could be you the owner, or it could be a professional property manager. Typically, professional PM costs about 10% of gross rents. There are also lease up fees, sometimes called tenant placement fees, that can cost as much as 1 month's rent. There may also be several other types of fees. Management can make or break your deal, so finding good management should always be a top concern for a rental property investor. 

• PMI: Private Mortgage Insurance

Private mortgage insurance helps protect the lender in the event you can no longer pay your mortgage. It protects them from loss should the sale of your home in foreclosure not cover their exposure. Although it protects the lender, the premiums are paid by you. Usually to the tune of 1% of the loan amount per year. 

PMI is required to be purchased if your LTV% is higher than 80%. This means that investors often don't have to pay PMI since they usually put down 20% or more. Which is good! PMI only helps the lender, so avoid it if you can.

• PITI: Principal, Interest, Tax, Insurance.

PITI refers to your total housing payment when you own a house. This does not include expenses like repairs, vacancy, etc. Just those payments listed in the acronym. 

• Equity:

Your home's value minus how much you owe on the property. If your property could sell for 100k, and you owe 80k on it, you have 20%, or 20k in equity. 

• Title:

Title refers to ownership of a property. If you "hold title" it means you own the property. Multiple people can be on title, for example in the case of a couple, or in the case of business partners. 

• Note:

A note refers to a loan. In real estate it refers to a mortgage specifically. An investor can buy and sell notes just like he or she can buy or sell houses. Technically, a note refers to how a loan will be repaid, and a mortgage refers to what will happen if the loan isn't repaid. That said, in most conversations the terms seem to be used interchangeably. There is a lot to note investing and you could read several books on the subject, so we won't dive into that here. 

• Seller Financing:

Sometimes the seller of a property may choose to provide financing to a potential buyer. This may allow the seller to sell the property at a higher price and also make a return on the interest rate charged to the buyer. From the buyer's perspective, seller financing allows the buyer to bypass rigorous lending requirements. It also gives the buyer more of an ability to negotiate loan terms. In the event that the buyer can't make his or her mortgage payments, the seller of the home can actually foreclose on the buyer, and re-take possession of the home. 

• Closing Costs:

There are several costs involved in the purchase of the home other than the downpayment, these are referred to collectively as "closing costs". Some examples include loan application fees, points, prepaid homeowners' insurance, appraisal fees, inspection fees, transfer taxes, escrow fees, prepaid interest, prepaid private mortgage insurance, and title insurance.

• Wholesale/Off-Market:

Off-market refers to a home that wasn't bought off the MLS (multiple listing service). The MLS allows real estate agents to "list" homes for other agents to see. When you look on zillow or redfin you are looking at MLS (sometimes referred to as retail) properties. 

Off market deals were properties obtained by some other means. It could be that they were purchased directly from a seller that the buyer made direct contact with (no agents involved) or some other means. 

Wholesalers use marketing methods, such as bandit signs, direct mail, web ads, billboards, etc to find "off-market deals". They then market those deals to investors for a profit. Investors like buying deals from wholesalers because they are still less expensive than retail properties. 

• BP: Biggerpockets.com

An awesome website with tons of free information on real estate investing. 

Well that's it!

If you guys have any questions please comment. Also, If anyone has anything to add or correct, again please comment. These are just my interpretations of 30 commonly used terms, and I'm sure there could be other interpretations or aspects that I have missed or misunderstood, so please feel free to chime in. 

Thanks for reading, I hope you learned something!

Trevor