20 Terms New Real Estate Investors Should Know

Real estate investing has a lingo all its own. For new real estate investors, it’s common to feel a little lost in a world of Cap Rates, FCFs, LTVs, and NOIs. This is when a real estate investing playbook, or at the very least, a dictionary, would come in handy.

To assist the new investors, I’ve rounded up 20 terms that are frequently encountered, frequently misunderstood, or both.

Active Income

When input leads to output, you have active income. That is, income that is generated as a direct result of particular action.

Appreciation

Appreciation in property occurs when the value of said property increases.

Amortization

Amortization is the paying off of both principal and interest loan debt with a fixed repayment schedule in regular installments over a period of time, unlike interest-only loans where the repayment installments consist of only interest payments and then the lump-sum principal repayment is paid as a single payment at the end of the load term.

Cash-on-Cash Return

Cash-on-cash return is a metric that is calculated by dividing the annual before tax cash flow by the total cash investment. This is one of the most common metrics used in commercial real estate.

Capitalization (Cap) Rate

The measure of a property’s yield throughout one year is call the capitalization or cap rate. This metric makes it easy to compare the cash flow between two or more properties.

Distributions

Distributions are payments that are typically paid out to investors over the course of a calendar year. These payments come from either profits or interest.

Equity

Real estate equity is measured as the amount of capital a property owner or developer puts into a property.

Free Cash Flow (FCF)

The measure of a property’s ability to generate cash after setting aside reserves for capital expenditures is called free cash flow.

Internal Rate of Return (IRR)

The Internal Rate of Return (IRR), in real estate terms, is a metric that evaluates the profitability of an investment over its lifetime. This is represented as the average annual return percentage. The IRR can be calculated to estimate potential future returns or to measure the performance of a completed investment.

Liquidity

The ease with which an investment property can be purchased or sold is referred to as liquidity. The most liquid securities are those which can be traded in high volume, or traded easily without creating wild fluctuations in price.

Loan-to-Value Ratio (LTV)

The loan-to-value ratio (LTV) is a risk assessment performed by lenders when they are considering a real estate loan.

Loan-to-Cost Ratio (LTC)

The ratio of a loan which helps finance a property investment compared to the total cost of the property is called the loan-to-cost ratio (LTC).

Net Operating Income (NOI)

Net operating income (NOI), in real estate terms, refers to the annual income an investment property generates after deducting the yearly operating expenses.

Private Equity Fund

Money from separate investors combined into a single collective investment fund is known as a private equity fund. This pooled money is then used to make investments.

Pro-Forma

The prediction of future real estate cash flows and total investment returns is a financial model known as pro-forma.

Redemption

The redemption period is a time frame during which a borrower can pay off back taxes or unpaid liens in order to reclaim their property. This action prevents the auction or foreclosure of the property.

Secured vs Unsecured Position

There are two position in the Capital Stack of an investment team — the secured position and the unsecured position. The secured position retains the right to foreclose on a property in the event of a default. The unsecured position has less collateral backing their investment claim, which means they do not have the right to foreclose on the property.

Tenancy / Occupancy

A building’s revenue source, in the form of the percentage of total square feet or units leased, is known as the tenancy or occupancy of the property.

Yield

Yield refers to the annual cash return on a commercial real estate investment. This metric is typically expressed as a percentage of the investment’s initial cost.

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