Real Estate Investment Glossary
Master the language of real estate investing with clear definitions and practical explanations for 31+ key terms.
A
Absorption Rate
The rate at which available homes are sold in a market during a given time period. Calculated by dividing total sales by available inventory. High absorption rates indicate strong demand and a seller's market.
Amortization
The process of paying off a loan through regular payments over time. Each payment includes both principal and interest. Early payments are mostly interest, while later payments are mostly principal.
Appreciation
The increase in a property's value over time. Market appreciation comes from broader economic factors. Forced appreciation comes from improvements you make to the property.
C
Cap Rate
Capitalization rate is the ratio of a property's net operating income (NOI) to its current market value or purchase price. It's used to estimate the potential return on an investment property, independent of financing. Formula: Cap Rate = NOI / Property Value × 100.
Capital Gains
The profit from selling an asset. Short-term gains (held <1 year) are taxed as ordinary income. Long-term gains (held >1 year) receive preferential rates of 0%, 15%, or 20% depending on income.
Cash-on-Cash Return
A metric that measures the annual pre-tax cash flow relative to the total cash invested in a property. Unlike cap rate, it accounts for financing and shows your actual return on invested capital. Formula: CoC = Annual Cash Flow / Total Cash Invested × 100.
Closing Costs
The fees and expenses paid at the closing of a real estate transaction, typically 2-5% of the purchase price. Includes loan origination fees, title insurance, appraisal, attorney fees, and prepaid expenses.
Cost Segregation
A tax strategy that accelerates depreciation deductions by reclassifying building components into shorter depreciation schedules (5, 7, or 15 years instead of 27.5). Particularly valuable for properties over $1M.
D
Days on Market (DOM)
The number of days a property has been listed for sale. Lower DOM indicates a hot market with strong demand. Higher DOM may indicate overpricing or weak demand, potentially creating negotiating opportunities.
Debt Service Coverage Ratio (DSCR)
A measure of a property's ability to cover its debt obligations. DSCR = NOI / Annual Debt Service. A DSCR of 1.25 means the property generates 25% more income than needed to pay the mortgage. Lenders typically require DSCR of 1.20-1.25 minimum.
Depreciation
A tax deduction that allows investors to recover the cost of income-producing property over time. Residential rentals depreciate over 27.5 years. This paper loss can offset rental income without requiring actual cash outlay.
Down Payment
The initial equity payment made when purchasing a property, typically expressed as a percentage of the purchase price. Investment properties usually require 20-25% down payment, compared to 3-20% for primary residences.
Due Diligence
The investigation period (typically 30-60 days) after a purchase agreement where buyers verify all aspects of the property: physical condition, financials, legal status, and market position.
E
Easement
A legal right to use another person's land for a specific purpose, such as utility access or a shared driveway. Easements transfer with the property and can affect its use and value.
Equity Multiple
The total cash returned to an investor divided by the total equity invested. An equity multiple of 2.0x means you doubled your money. Unlike IRR, it doesn't account for the time it took to achieve the return.
I
Internal Rate of Return (IRR)
The annualized rate of return that makes the net present value of all cash flows equal to zero. IRR accounts for the time value of money and is used to evaluate investment profitability over the entire holding period, including the sale.
Inventory
The number of homes available for sale in a market. Often expressed as months of supply—how long it would take to sell all current listings at the current sales pace. 4-6 months is considered balanced.
L
Leverage
Using borrowed money to increase the potential return on investment. Leverage amplifies both gains and losses. A property bought with 25% down has 4x leverage, meaning a 10% property appreciation creates a 40% return on equity.
Loan-to-Value (LTV)
The ratio of the loan amount to the appraised value of the property. LTV = Loan Amount / Property Value × 100. A 75% LTV means you're borrowing 75% of the property's value and putting 25% down.
P
Price-to-Rent Ratio
The ratio of median home price to median annual rent in a market. A ratio under 15 generally favors buying, while over 20 favors renting. Investors use this to identify markets where rental properties may be more profitable.
Property Class
A grading system (A, B, C, D) based on property age, condition, location, and amenities. Class A are newer, luxury properties in prime locations. Class C/D are older properties in less desirable areas with higher cap rates but more risk.
T
Title Insurance
Insurance that protects against financial loss from defects in title to real property. Title issues could include unknown liens, fraud, errors in public records, or undisclosed heirs claiming ownership.
Turn-Key
A fully renovated, tenant-occupied property that generates income immediately upon purchase. Turn-key properties are ideal for passive investors but typically sell at premium prices with lower cap rates.