Real Estate Investing Terms and Definitions
As a real estate investor, one must learn the real estate investing terms and investment vocabulary and understand what they mean.Here are definitions of some of the real estate terms you might come across:
Acceleration Clause - a loan clause that gives the lender the right to declare the entire amount immediately due and payable upon violation of another specific loan provision. This is also often referred to as the Due on Sale Clause.
Capitalization Rate (Cap Rate) - Net Operating Income divided by Market Value. If the net operating income is $100,000 and the market value of the property is $1,000,000 then the cap rate is 10%. This is one of the most commonly heard real estate investing term.
Cash Flow - Net Operating income minus the total of all debt service payments. (See definition of "net operating income" below.) Another popular real estate investing term.
Chain of Title - a history of conveyances and encumbrances affecting a title from the time that the original patent was granted or as far back as records are available.
Clear Title - a marketable title that is free of clouds and disputed interests.
Conditions, Covenants, and Restrictions (CCR's) - promises written into deeds and other instruments agreeing to performance or non-performance of certain acts, or requiring or prohibiting certain uses of the property.
Conforming Loan - A loan which has underwriting criteria that conforms to the strict guidelines of Fannie Mae, Freddie Mac, FHA or VA.
Contingency - A condition that must be met before a contract is legally binding.
Conventional Loan - A conforming loan with no government guarantee; that is, a Fannie Mae or Freddie Mac loan. (See definition of "conforming loan" above.).
Debt Coverage Ratio (DCR) - A ratio used in underwriting loans for income properties. Divide Net Operating Income by total debt service. Ratios of 1.20 and higher considered the norm. This is a real estate investing term commonly used by lenders.
Debt to Income Ratio - Also known as debt ratio. Divide total of monthly debt payments to gross monthly income. Another popular real estate investing term with lenders.
Debt Service - mortgage payments of principal and interest.
Discount Points - One point equals one percent of the loan amount. Two points on a $200,000 mortgage would cost $4,000.
Due Diligence - The act of carefully reviewing, checking and verifying all of the facts.
Gross Rent Multiplier - the sales price divided by the gross annual rental income. Another common real estate investing term.
Loan-to-Value (LTV) - The ratio of the loan to the value of the property. If the loan is $160,000 and the value of the property is $200,000, the LTV is 80%.
Negative Amortization - Some adjustable rate mortgages allow the interest rate to fluctuate independently of a required minimum payment. If a borrower makes the minimum payment it may not cover all the interest that is due at the current interest rate, resulting in the borrower deferring the interest payment.The deferred interest is added to the balance of the loan and the loan balance grows larger instead of smaller. This is called negative amortization.
Net Operating Income (NOI) - Gross income minus all Operating Expenses except for debt service. Cash flow is defined as NOI minus the total of all debt service payments.
Non-conforming Loan - A loan not meeting the underwriting requirements of Fannie Mae and Freddie Mac. e.g. the vast majority of loans.
PITI - acronym for Principal (P), Interest(I), property taxes (T) and insurance (I).
Prepayment Penalty - fee charged by lender for paying off a loan within a specified period of time after the loan has closed.
Quitclaim Deed - a deed that conveys only the grantor's rights or interest in a property, without stating the nature of the rights or interest and with no warranties of ownership.
Triple Net Lease - lease in which the tenant pays all operating expenses of the property e.g. taxes, insurance, and maintenance in addition to normal operating expenses.