Investment Terms
Word of the Day
Bull Market
Refers to a financial market characterized by rising prices and optimism among investors. It often reflects a strong economy, increasing corporate profits, and high investor confidence.These definitions are not intended to be comprehensive but should provide enough information
to explain the general meaning of each term.
This list of terms is not a substitute for financial advice.
A
Absorption Rate
Tells you how fast houses sell in a specific area; a high rate means strong demand and a seller’s market, while a low rate suggests more options for buyers.
Accredited Investor
An accredited investor is an individual or entity that meets certain financial criteria established by regulatory authorities, such as the U.S. Securities and Exchange Commission (SEC). Accredited investors are considered to have the financial sophistication and resources to sustain the risk of loss associated with certain investment opportunities.
Acquisition Fee
A one-time payment, typically 1-3% of the purchase price, compensating a firm for sourcing, acquiring, and closing a deal. It covers expenses like searching for properties, due diligence, and negotiations.
Apartment Syndication
When a group of investors pool their money to buy and manage an apartment complex, collectively benefiting from rental income and potential property appreciation upon sale. Imagine a team effort to purchase a big apartment building, sharing the profits and workload.
Appraisal
Is an unbiased professional estimate of a property’s current market value, used for transactions, financing, and investment decisions.
Appreciation
Is the increase in a property’s value over time, driven by factors like market demand, location, and improvements, resulting in potential profit upon selling.
Asset Allocation
The strategic distribution of an investment portfolio across different asset classes, such as stocks, bonds, real estate, and cash. It aims to balance risk and reward based on an investor’s goals and risk tolerance.
Asset Management
The strategic management of an investment portfolio to maximize returns and minimize risks.
Assisted Living
A housing option within senior living communities for older adults who need some level of support. Assistance is provided with daily activities such as bathing, dressing, and medication management.
Average Annual Return (AAR)
A measure used to calculate the average rate of return on an investment over a specific period, typically expressed as an annual percentage. It takes into account the total returns generated by the investment and divides it by the number of years in the investment period.
B
Bear Market
Describes a financial market that experiences a prolonged period of falling prices and pessimism. A bear market is the opposite of a bull market and is typically associated with a weak economy, declining corporate profits, and low investor confidence.
Bridge Loan
Is a short-term, high-interest financing for real estate investors, used to gap the time between buying and selling properties, often with the investor’s existing property as collateral.
Bull Market
Refers to a financial market characterized by rising prices and optimism among investors. It often reflects a strong economy, increasing corporate profits, and high investor confidence.
C
Capital Expenditures (CapEx)
Refer to the funds spent on acquiring, improving, or maintaining long-term assets like property or equipment. CapEx typically involves significant investments that enhance the value or functionality of an asset, rather than regular operating expenses.
Capital Gain
Refers to the profit realized when an investment is sold for a higher price than its original purchase price. It is calculated by subtracting the purchase price (cost basis) from the selling price.
Capitalization Rate (Cap Rate)
A measure used to evaluate the return on investment of an income-generating property. It is calculated by dividing the property’s net operating income by its purchase price.
Cash Flow
The money left over after all property expenses are paid from the rental income, essentially your profit from owning and renting the property.
Cash-on-Cash Return
A financial metric used to measure the profitability of an investment property. It compares the cash flow generated from the investment to the amount of cash invested. This metric is calculated by dividing the annual before-tax cash flow by the initial cash investment and is typically expressed as a percentage.
Continuing Care Retirement Community (CCRC)
A senior living community that offers a continuum of care, including independent living, assisted living, and nursing care. CCRCs allow residents to transition seamlessly as their care needs change over time.
Cost Segregation
A tax planning strategy used in real estate investments. It involves identifying and segregating different components of a property, such as land, building, and equipment, for the purpose of accelerating depreciation deductions and reducing tax liabilities.
D
Deal Sponsor
An individual or entity responsible for identifying and executing investment opportunities. Also referred to as a syndicator, they often lead and manage the investment project, bringing together investors, analyzing deals, and overseeing the implementation of the investment strategy.
Debt Service Coverage Ratio (DSCR)
A financial metric used to assess a borrower’s ability to cover their debt obligations. It measures the ratio of a property’s net operating income to its debt service payments, indicating the property’s cash flow capacity to service its debt.
Depreciation
Refers to the decrease in the value of an asset over time due to wear and tear, obsolescence, or other factors. It is often used for accounting purposes to allocate the cost of an asset over its useful life, reducing its value gradually.
Distribution
Refers to the allocation or payment of profits, income, or cash flow to investors or partners. It represents the distribution of returns generated by an investment or business operation to the stakeholders involved.
Diversification
A risk management strategy that involves spreading investments across different asset classes, sectors, and geographic regions. It aims to reduce the impact of any single investment’s performance on the overall portfolio.
Due Diligence
The comprehensive research and analysis conducted by investors or buyers before making an investment or entering into a business transaction. It involves examining relevant information, such as financial statements, legal documents, market conditions, and potential risks, to assess the viability and potential risks associated with the investment.
E
Economic Vacancy
Refers to the portion of a rental property’s available space that is unoccupied and not generating rental income, despite being physically available. It takes into account factors like market conditions, tenant turnover, and rental rates.
Equity Investment
Gives you ownership in a property, earning returns through rental income and potential appreciation, but also comes with direct responsibility and market risk.
Equity Multiple
A financial metric used to measure the return on investment in a real estate or business project. It calculates the total cash flow or proceeds received from the investment relative to the initial equity investment, providing a multiple of the original investment amount.
Exit Strategy
Outlines how you’ll cash out or “exit” your investment, maximizing profit and minimizing risk, when the time comes. This could involve selling, refinancing, or converting the property to another income stream.
G
General Partner (GP)
An individual or entity responsible for managing and operating a partnership. GPs have unlimited personal liability and are actively involved in the decision-making and day-to-day activities of the partnership. They often contribute both capital and expertise to the venture.
Gross Potential Income (GPI)
Is the maximum theoretical income a property could generate if all units are rented at market rate, assuming 100% occupancy and perfect rent collection.
H
Hold Period
Is the length of time you plan to own a property, impacting your return through rent, appreciation, and capital tied up.
I
Independent Living
A housing option within senior living communities that provides self-contained homes or apartments for active seniors who can live independently and prefer a maintenance-free lifestyle.
Internal Rate of Return (IRR)
A financial metric used to estimate the profitability of an investment. It calculates the rate at which the investment’s net present value (NPV) becomes zero. IRR represents the compound annual growth rate that an investment is expected to generate and is often used to compare different investment opportunities.
Investment Property
A property purchased with the intention of generating income or appreciation, rather than for personal use.
K
K-1
A tax form used in the United States to report a partner’s or shareholder’s share of the income, losses, deductions, and credits from a pass-through entity.
L
Letter of Intent (LOI)
A document that outlines the preliminary agreement or understanding between parties in a business transaction. It expresses the intention and key terms of a proposed deal, serving as a starting point for further negotiations and due diligence before formalizing a binding agreement.
An investor in a partnership who contributes capital to the venture but has limited liability and minimal involvement in the day-to-day management of the business. LPs provide funding and share in the profits or losses generated by the partnership, while the general partner assumes responsibility for managing the partnership.
Loan-to-Value (LTV)
A financial metric used by lenders to assess the risk of a loan by comparing the loan amount to the appraised value or purchase price of the property. It indicates the percentage of the property’s value that is financed by the loan.
M
Memory Care
A specialized form of senior living that is designed for individuals with Alzheimer’s disease, dementia, or other forms of memory impairment. Memory care communities provide tailored care and support services for these residents.
Multifamily
Residential properties designed for multiple households in one building or complex. Examples include apartment buildings, condos, townhouses, and duplexes. They offer shared amenities like common areas and parking. Multifamily properties can be owned by individuals, REITs, or property management companies, providing rental income and requiring specific management and tenant regulations.
N
Net Present Value (NPV)
A financial metric used to determine the value of an investment by comparing the present value of cash inflows and outflows over time. It takes into account the time value of money and helps assess the profitability or feasibility of an investment.
Net Operating Income (NOI)
The total income generated by a property from its operations, such as rental income and other revenue, minus the operating expenses required to maintain and manage the property. NOI is a key indicator of a property’s profitability.
O
Occupancy Rate
The percentage of units or rooms within a property that are currently occupied by tenants or residents.
Operating Agreement
Is a legally binding document outlining how a real estate investment LLC operates, its members’ roles, responsibilities, and profit sharing, preventing future disputes and ensuring smooth business flow.
Operating Expenses
Ongoing costs incurred to manage and maintain a property, directly impacting your net operating income. These expenses cover things like property taxes, utilities, insurance, repairs, and property management fees.
P
Physical Vacancy
Represents the portion of a rental property’s available space that is unoccupied and physically vacant, regardless of its income-generating potential. It excludes any temporarily unoccupied units or spaces that are actively being marketed for lease.
Passive Investing
Refers to an investment strategy where individuals or entities buy and hold an asset or a diversified portfolio of assets for the long term, rather than trying to time the market. It is a go-to strategy for long-term investors because it capitalizes on the typical upward trend of the overall market over many years, which tends to be favorable.
Private Placement Memorandum (PPM)
A legal document that provides detailed information about an investment opportunity to potential investors. It discloses essential information such as investment objectives, risks, terms, and financial projections to help investors make informed decisions.
Portfolio
A collection of investments held by an individual or an entity. It may include stocks, bonds, mutual funds, real estate, and other investment vehicles. Diversification across different asset classes and sectors is often sought to manage risk.
Preferred Return (Pref)
Also known as a preferred dividend, refers to a priority distribution of profits to certain investors before other equity holders receive their share. It is a fixed or variable rate of return agreed upon in the investment terms, ensuring that these investors receive their expected returns before others.
Property Management
The administration, operation, and oversight of real estate properties on behalf of the owner.
R
Ratio Utility Billing System (RUBS)
A method used to allocate utility costs among multiple tenants in a property. It calculates each tenant’s share of the total utility expenses based on factors such as square footage, number of occupants, or other predetermined ratios.
Real Estate Investment Trust (REIT)
A company that owns, operates, or finances income-generating real estate assets.
Refinancing
Replacing your existing loan with a new one, typically aiming for a lower interest rate, adjusting loan terms, or accessing cash tied up in your property.
Rent Growth
Refers to the increase in rental income over time, boosting an investor’s overall return and potentially outpacing inflation for a stronger financial position.
Rental Rate
The recurring income generated from leasing a property is typically expressed monthly, and is a key factor in determining investment profitability.
Reposition
Involves strategically upgrading or transforming a property to attract a different tenant pool, boost profits, and improve its market appeal. Think of it as giving your property a makeover to suit a new audience and unlock hidden value.
Recourse Loan
Holds you personally liable for the debt if the property value falls short, meaning they can seize other assets beyond the property itself to recoup losses.
Return on Investment (ROI)
A measure of the profitability of an investment, calculated as the gain or loss relative to the amount invested.
Risk Tolerance
Refers to an investor’s willingness and ability to endure fluctuations in the value of their investments. It is influenced by factors such as investment goals, time horizon, financial situation, and psychological factors.
S
Sales Comparison Approach
Estimates a property’s value by comparing it to similar recently sold properties in the area, adjusting for differences in features and market conditions.
SEC Attorney
Specializes in navigating complex securities regulations related to offerings, funds, and investments involving real estate assets, ensuring compliance and protecting investor interests.
Self-directed IRA
A traditional or Roth individual retirement account (IRA) that provides a wider range of investment options beyond traditional assets like stocks and bonds. With a self-directed IRA, an individual can save for retirement on a tax-advantaged basis by investing in real estate and other types of alternative assets. Individuals must adhere to IRS regulations to maintain the tax benefits of the account.
Self-directed 401k
An employer-sponsored retirement account that gives individuals more control over their investment choices, allowing for a broader range of options, such as real estate and private businesses. Individuals must still comply with IRS rules to maintain the account’s tax advantages.
Senior Living
Housing for older adults, typically aged 55 or older. Senior living communities offer a range of housing options and services to meet their unique needs, including independent living for active seniors; assisted living for daily support; memory care for individuals with dementia; and CCRCs for a range of care levels. Senior living communities provide amenities, activities, and healthcare services to promote an active and supportive environment.
Short-term Rental
A property rented for a brief duration, often a few days to several months. Popular among travelers seeking alternatives to hotels, short-term rentals are facilitated through online platforms like Airbnb, VRBO, and Booking.com. Property owners generate income by offering their vacant or underutilized spaces for short-term stays.
Sponsor
The leader who finds, acquires, and manages properties, allowing passive investors to participate without the heavy lifting.
Sophisticated (Non-Accredited) Investor
Refers to an individual who possesses sufficient knowledge, experience, and understanding of financial and investment matters to evaluate the risks and merits of a particular investment opportunity. Unlike accredited investors, sophisticated investors do not meet specific financial criteria established by regulatory authorities, such as the U.S. Securities and Exchange Commission (SEC) but are still deemed capable of making informed investment decisions.
Subscription Agreement
A legally binding document that formalizes an investor’s commitment to participate in an investment opportunity. It outlines the terms and conditions of the investment, including the investment amount, payment terms, and rights and responsibilities of the investor.
Supplement Loan
Is additional financing secured on an existing property, often used to access cash without refinancing or selling, typically with higher interest rates and subordinate to the primary mortgage.
Syndication
Refers to the process of pooling resources from multiple investors to collectively invest in a particular project or opportunity. It typically involves a syndicator or sponsor who identifies and manages the investment, while the investors contribute funds and share in the risks and potential returns.
T
Tenant Satisfaction
The level of contentment and happiness expressed by tenants or residents. Tenant satisfaction is an important aspect of property management and can contribute to tenant retention and positive word-of-mouth referrals.
U
Underwriting
The process of evaluating the risk and determining the terms and conditions of an investment or insurance policy. It involves assessing factors such as financial stability, creditworthiness, and potential risks associated with the investment or insurance coverage.
V
Value-add Real Estate
Refers to properties that have the potential to increase in value through strategic improvements or changes. Investors aim to enhance the property’s income-generating capabilities, physical condition, or market positioning to generate higher returns.
Volatility
Measures the degree of variation in the price of a financial instrument, such as a stock or an index. High volatility indicates significant price fluctuations, while low volatility suggests more stable prices.
W
Waterfall
A distribution structure used to allocate profits or cash flows among investors in a real estate or investment partnership. It defines the order and priority of how profits are distributed, typically favoring certain investors or classes of investors based on predetermined criteria.
#
1031 Exchange
Also known as a like-kind exchange or a tax-deferred exchange, is a provision under the United States Internal Revenue Code that allows investors to defer paying capital gains taxes when selling a property and reinvesting the proceeds into a similar property within a specified time frame. This provision is commonly used in real estate investments.
