Investor Glossary

Accredited Investor

An accredited investor is an individual who meets the criteria for financial sophistication based on income, assets, or experience, as defined by the SEC. This status permits them to invest in opportunities not directly overseen by the SEC, such as private investments like real estate syndications.

Acquisition Cost

Acquisition cost, also known as the cost of acquisition, encompasses the total expenses of purchasing an investment property, including mortgage loan fees, closing costs, inspection fees, and more.

Annual Depreciation Allowance

An annual depreciation allowance is a tax deduction enabling property owners to reduce their taxable income by a percentage of the asset’s purchase price over its “useful life,” as defined by taxing authorities and detailed in a depreciation schedule.

Annualized Returns

Annualized returns are investment gains adjusted to reflect a one-year period, allowing for consistent comparisons across different investments by standardizing their performance over 12 months.

Anticipated Hold Period

The anticipated hold period refers to the duration an investor plans to retain ownership of an asset before selling it.

Appreciation

Appreciation is the increase in the value of an asset over time. In real estate, the goal is for the property to appreciate, resulting in a profitable return upon sale. Factors influencing appreciation include demand, supply, property improvements, interest rates, inflation, and the local real estate market.

Basis Point

A basis point is one-hundredth of a percent, commonly used in real estate to describe changes in mortgage interest rates.

Building Classifications

Investment properties are categorized into four classes: A, B, C, and D. These classifications reflect the property’s general condition, location quality, and amenities, aiding investors in assessing value, risk, and profitability.

Cap Rate

Cap rate (capitalization rate) is the ratio of net operating income (NOI) to the purchase price of a property, expressed as a percentage. It is calculated by dividing NOI by the property’s purchase price.

Capital Expenditures

Capital expenditures (CapEx) are funds allocated for purchasing, maintaining, or upgrading tangible assets, such as renovating a rental property.

Capital Gains

Capital gains are the profits from selling an asset, calculated as the sale price minus the acquisition costs.

Capital Gains Tax

Capital gains tax is the federal and/or state tax on profits from investment sales. For instance, selling an investment property typically incurs capital gains tax, often at a lower rate than earned income.

Cash Flow

Cash flow refers to the movement of money into and out of an investment, commonly representing the net income from rental properties.

Cash-on-Cash Return

Cash-on-cash return measures the annual pre-tax cash income relative to the cash invested in a property, expressed as a percentage. It is calculated by dividing annual pre-tax cash flow by total cash invested.

Cash Reserves

Cash reserves are funds set aside to cover unexpected or emergency expenses.

Class A Property

Class A properties are high-quality, typically less than 15 years old, situated in prime locations, demanding high rents, and requiring minimal maintenance.

Class B Property

Class B properties are older than Class A, generally well-maintained but may have some deferred maintenance and value-add opportunities.

Class C Property

Class C properties are over 20 years old with significant deferred maintenance, often located in less desirable areas.

Class D Property

Class D properties are old, in poor condition, and require substantial renovation or even rebuilding to be investment-worthy.

Compound Annual Growth Rate (CAGR)

CAGR represents the mean annual growth rate of an investment or portfolio over a specified period, reflecting average annual growth.

Compounded Interest

Compounded interest is the interest earned on both the initial principal and the interest that has already been added to it.

Crowdfunding

Real estate crowdfunding involves multiple investors pooling funds to invest in a property together, typically facilitated by online platforms that manage the project and distribute profits to investors.

Debt

Debt is the amount of money owed on a loan balance.

Debt-to-Equity Ratio

The debt-to-equity ratio measures the proportion of an asset financed by debt versus owned equity.

Debt-to-Income Ratio (DTI)

DTI compares the total monthly debt payments to the monthly income of a household.

Depreciation

Depreciation is a tax deduction based on the declining value of a property over its useful life.

Distributions

In real estate, distributions are periodic payments to investors from the income generated by a property, such as dividends, interest, or rental income.

Diversification

Diversification involves spreading investments across different assets to reduce overall portfolio risk.

Dividend

A dividend is a regular payment to shareholders from a company’s profits or reserves.

Dividend Yield

Dividend yield is a metric indicating the return on a dividend-paying stock, calculated by dividing the dividend per share by the purchase price per share.

Due Diligence

Due diligence involves comprehensive research and analysis before making significant decisions, like purchasing property or entering contracts.

Earnest Money

Earnest money is an upfront deposit paid by a property buyer to show seriousness about the purchase, often held during the contract period and potentially refundable based on contract terms.

Equity

Equity is the value of an asset minus the amount owed on its financing.

Equity Multiple

Equity multiple measures the rate of return on an investment based on distributions received, calculated by dividing total distributions by the total capital invested.

Escrow

Escrow is a third-party arrangement holding funds on behalf of two parties during a transaction, ensuring funds are distributed appropriately once the transaction is complete.

Estimated Total Cash Return

Estimated total cash return calculates the total expected cash generated from an investment property over a specific period, subtracting all property expenses.

Estimated Total Gain

Estimated total gain projects the profit or value increase expected from an investment property, considering purchase price, sales price, income, and expenses.

Equity Fund

An equity fund is an investment pool where investors receive ownership stakes in an asset, such as a real estate syndication, pooling capital for shared ownership.

Fair Market Value (FMV)

FMV is the price a property would sell for on the open market at a given time, reflecting what a willing buyer would pay and a willing seller would accept under typical conditions.

Fractional Ownership

Fractional ownership involves multiple investors jointly owning a high-value asset, like a property, with each investor entitled to their share of income or use.

Financing

Financing is the portion of a property’s purchase price funded by a lender, such as a bank.

General Partner (GP)

The General Partner is part of a partnership structure typically used in real estate syndications. The GP is responsible for managing the investment and making day-to-day decisions. They oversee the acquisition, financing, management, and eventual sale of the property. 

Gross Operating Income (GOI)

GOI is the total income generated by a property, including rent and other revenue sources, before deducting operating expenses.

Gross Yield

Gross yield is the total earnings from an investment before taxes and expenses, expressed as a percentage of the investment amount.

Hold Period

The hold period is the actual duration an investor owns an asset before selling it.

Internal Rate of Return (IRR)

IRR measures potential investment profitability using discounted cash flow analysis, setting the net present value (NPV) of all cash flows to zero, ignoring external factors like inflation.

Investment Property

An investment property is real estate purchased to generate returns through rental income, future sales, or both.

Investment Waterfall

(Distribution Waterfall)
The investment waterfall details how profits or losses are distributed to investors, typically structured to prioritize the sponsor’s risk-bearing.

Management Fee

A management fee is charged for day-to-day asset management, typically a percentage of rental income for property managers handling tenant-related tasks.

Mixed-Use Building

A mixed-use building combines different property types, such as an apartment building with retail storefronts on the ground floor.

Mortgage

A mortgage is a loan used to purchase real estate, with the property serving as collateral, repaid over time with interest.

Multi-Family Home

A multi-family home contains multiple individual units within one building, providing separate living spaces for different families.

Net Cash Flow

Net cash flow is the recurring income from an asset after expenses, like rental income minus property expenses.

Net Profit

Net profit is the earnings after all expenses are paid, calculated by subtracting expenses from total revenue.

Net Operating Income (NOI)

NOI is the annual income generated by an investment property after deducting operating expenses.

Operating Expenses

Operating expenses are costs associated with running a property, including insurance, utilities, taxes, management fees, and maintenance.

Opportunity Zone

An opportunity zone is a designated area needing economic development, offering tax incentives to investors for revitalizing the local economy.

Oversubscription

Oversubscription occurs when demand for an investment opportunity exceeds the available shares.

Real Estate Syndication

Real estate syndication involves multiple investors pooling funds to invest in a property, managed by a Syndicator responsible for the property’s operations and providing ownership stakes to investors.

Refinancing

Refinancing replaces an existing mortgage with a new one under better terms, often to lower interest rates or access equity through a cash-out refinance.

Regulation D

Regulation D provides exemptions from SEC regulation for companies raising private capital through private securities offerings.

Rent Increase

A rent increase raises rental rates compared to previous periods, expressed as a dollar amount or percentage.

Return on Investment (ROI)

ROI is the profit from an investment, expressed as a percentage of the invested amount, calculated by dividing net profit by total investment.

SEC Rule 506c

SEC Rule 506c allows organizations to publicly solicit investments exempt from SEC regulation if they verify all investors are accredited.

Securities and Exchange Commission (SEC)

The SEC is a U.S. government agency regulating certain investment types, like stocks, bonds, and mutual funds, to protect investors.

Self-Directed Individual Retirement Account (SDIRA)

An SDIRA is a retirement account giving the holder control over their investments, allowing for alternative assets like real estate, precious metals, and tax liens.

Self-Directed IRA

A self-directed IRA is a tax-advantaged account offering greater investment control, including alternative assets beyond traditional securities.

Term

In real estate, a term refers to a contracted period, such as the length of a mortgage or investment period.

1031 Exchange

A 1031 exchange defers taxes on investment profits by reinvesting them into a new investment project.

Turn-Key Property

A turn-key property is ready for occupancy immediately, requiring no renovations or modifications.

2% Rule

The 2% rule suggests that the monthly rental income should be at least 2% of the property’s purchase price to be profitable.

Underwriting

Underwriting assesses the financial risk of lending funds to a borrower.

Valuation

Valuation determines a property’s current value, typically based on comparable sales, income generation, or replacement cost. A formal valuation by a licensed professional is called an appraisal.

Value Add Asset

A value-add asset in multifamily real estate is a property with potential for increased value through strategic improvements or management enhancements.

Wholesaling

Wholesaling involves getting a property under contract and selling the purchase contract to another buyer, with profit being the difference between the agreed purchase price and the final sale price.

Yield

Yield is the income or return from an investment, usually expressed as a percentage of the property’s value or investment cost.

Zoning

Zoning determines the type of structures allowed on a property and their use, such as restricting apartment complexes in single-family home zones.