The one percent rule refers to the rent to expense ratio an investment property must have in order to be profitable. While there are a number of expenses to keep in mind, the rent on an investment property must be at least 1% of the purchase price to have a positive ROI and be considered a favorable investment asset.
Financial plans that allow employees to set aside tax-deferred income for retirement or emergency purposes.
An interior style that features a steeply peaked roofline and a ceiling that is open to the top rafters.
The summary of a court judgment that creates a lien against a property when filed with the county recorder.
A tax calculation that provides greater depreciation in the early years of ownership of real estate or personal property.
A bookkeeping method that depreciates property faster in the early years of ownership.
A provision that gives a lender the right to collect the balance of a loan if a borrower misses a payment.
The seller's written approval of a buyer's offer.
Any means by which a person can enter property.
The degree to which a building or site allows access to people with disabilities.
The gradual addition to the shore or bank of a waterway by deposits of sand or silt.
A written declaration affirming that a person acted voluntarily.
A measurement of land equal to 43,560 square feet.
The volume of material needed to cover an acre of land one foot deep.
A system that utilizes electric pumps or fans to transfer solar energy for storage or direct use.
The number of years a structure has been standing.
The interest a borrower pays on the principal for the duration of the loan.
An addition or change to a contract.
Extra money included in the monthly payment to help reduce the principal and shorten the term of the loan.
A loan with an interest rate that is periodically adjusted to reflect changes in a specified financial index.
The cost of any improvements the seller makes to the property. Deducting the cost from the original sales price provides the profit or loss of a home when it is sold.
The amount of time between interest rate adjustments in an adjustable-rate mortgage.
A person given authority to manage and distribute the estate of someone who died without leaving a will.
A legal document that an administrator of an estate uses to transfer property.
The acquisition of title to property through possession without the owner's consent for a certain period of time.
The access and use of property without the owner's consent.
Soil that is composed of materials deposited by the wind.
A person who makes a sworn statement.
A substitution for an oath granted to people based on religious reasons.
The relationship of trust that exists between sellers and buyers and their agents. The agency is formed through a written contract.
The process by which a lender uses a title company or other firm as an agent to complete a loan.
A person licensed by the state to conduct real estate transactions.
A compromise boundary to which property owners agree in order to resolve a dispute.
A document the buyer initiates and the seller approves that details the price and terms of the transaction.
A recessed section of a room, such as a breakfast nook.
A provision that requires the borrower to pay the balance of the loan in a lump sum after the property is sold or transferred.
Mineral salt found in soil.
Soil that contains a higher concentration of mineral salt than natural acid.
A lane behind a row of buildings or between two rows of buildings.
Budgets offered by builders of new homes for the purchase of carpeting and fixtures.
Any home loan that does not conform to a standard fixed-rate mortgage.
A metal covering that provides an alternative to paint for owners of wood homes.
Wooden windows with aluminum covering the exterior.
Parks, swimming pools, health-club facilities, party rooms, bike paths, community centers and other enticements offered by builders of planned developments.
The American Society of Home Inspectors is a professional association of independent home inspectors. Phone: (800) 743-2744.
A law passed in 1990 that outlaws discrimination against a person with a disability in housing, public accommodations, employment, government services, transportation and telecommunications.
The process of paying the principal and interest on a loan through regularly scheduled installments.
Mathematical tables that lenders use to calculate a borrower's monthly payment.
The strength of an electrical current.
A large steel bolt anchored in concrete and attached to a building to prevent the structure from moving.
Any kind of plant that must be planted every year.
A yearly statement to borrowers that details the remaining principal and amounts paid for taxes and interest.
The cost of the loan expressed as a yearly rate on the balance of the loan.
A communication that informs a party that the obligations of the original contract will not be fulfilled.
A document that details a potential borrower's income, debt and other obligations to determine credit worthiness.
The fee that a lender charges to process a loan application.
An opinion of the value of a property at a given point in time.
The fee that an appraiser charges to estimate the market value of the property.
A detailed written report on the value of a property based on recent sales of comparable sites in the area.
An opinion of the current market value of a property.
Appreciation refers to the increase in the value of a property over time. Appreciation can be caused by a number of things including inflation, the increase in demand or a decrease in supply of properties. Appreciation can also take into account added value as a result of property improvements (such as upgrading a kitchen, adding a room or a pool, etc.). Appreciation is usually projected as a percentage of the property’s value over the course of a year.
An increase in the value of a home or other property.
A method of resolving a dispute in which a third party renders a decision.
An area shaded by trees, shrubs or vines on a latticework structure.
A curved structure that supports weight over an area, such as a doorway.
A licensed professional who designs homes, buildings and other structures.
The fee an architect charges for services. In general, architects charge for their services by the hour, by the square foot, or by a percentage of the project budget.
A French measurement of land equal to .84625 acres.
The purchase or sale of a property in its existing condition.
A fire-resistant mineral used for insulation and home products that has been found to pose a health hazard.
A seller's initial price for a property.
A tax assessor's determination of the value of a home in order to calculate a tax base.
The estimated value of a piece of real estate or a levy placed on property in addition to taxes.
A list of taxable property compiled by the assessor.
Items of value which include cash, real estate, securities and investments.
A person who transfers rights and interests of a property.
A mortgage that can be transferred to another borrower.
A provision that allows a buyer to take responsibility for the mortgage from a seller.
A fee the lender charges to process new records for a buyer who assumes an existing loan.
The price of a home determined by totaling the sales prices of all houses sold in an area and dividing that number by the number of homes.
An easement over private property near an airport that limits the height of structures and trees.
Single-sash windows that tilt outward and up.
The risk that a borrower will not be able to make a balloon (lump sum) payment at maturity due to a lack of funding.
A loan with a maturity that is shorter than the amortization period.
The state of an entity that is unable to repay its debts as they become due.
Proceedings under federal statutes to relieve a debtor who is unable or unwilling to pay its debts. After addressing certain priorities and exemptions, the bankrupt entity's property and other assets are distributed by the court to creditors as full satisfaction for the debt.
The original mortgage amount adjusted for subsequent fundings and principal payments without regard to accrued interest or other unpaid debt.
A set amount used as a minimum rent with provisions for increasing the rent over the term of the lease.
Actual taxes and operating expenses for a specified year, most often the year in which a lease commences.
1/100 of 1 percent.
Any structure or portion of a structure located underground or below the surface grade of the surrounding land.
An employee covered by an employee benefit plan.
Also referred to as "the Beta coefficient," Beta is a statistical term used by money managers operating in the tradable equities securities market. Essentially, Beta is a measure of the volatility, or systematic risk, of a particular security or a portfolio in comparison to the market as a whole. Beta typically is used as a component of the capital asset pricing model (CAPM), which calculates the expected return of an asset based on its beta and expected market returns. Beta is calculated using regression analysis in an attempt to quantify the tendency of a security's returns to respond to swings in the market. A beta of 1 indicates that the security's price will move in lock step with the market. A beta of less than 1 means that the security will be less volatile than the market. A beta of greater than 1 indicates that the security's price will be more volatile than the market. For example, if a stock's beta is 1.2, it's theoretically 20% more volatile than the market. Utilities stocks typically have a beta of less than 1. Conversely, the majority of high-tech, typically Nasdaq-based stocks have a beta of greater than 1. Stocks with a beat of greater than 1 are believed to offer the possibility of a higher rate of return, but also require the investor to assume higher risk.
An offer, stated as a price or spread, to buy whole loans or securities.
A commingled fund accepting investor capital without prior specification of property assets.
Also referred to as common shareholder's equity, this is the total shareholder's equity as of the most recent quarterly balance sheet minus preferred stock and redeemable preferred stock.
A person who acts as an intermediary between two or more parties in connection with a transaction
Space improvements put in place per the tenant's specifications. Takes into consideration the amount of tenant finish allowance provided for in the lease agreement.
A method of leasing property whereby the developer/landlord builds to a tenant's specifications.
The area of land that is available to be built on after subtracting for roads, setbacks, anticipated open spaces and areas unsuitable for construction.
Property values are determined by asset classifications. Investment property falls under one of four main categories: Class “A”, “B”, “C”, or “D”. A property’s classification is determined by its market value. Class A properties refer to property in the most in-demand markets. They typically boast impressive aesthetics and construction, and require little renovations. Class “A” properties demand the highest rents.
In comparison, an income property that falls into classes “B”, “C”, or “D”, will be categorised by less appealing features, such as an older property, poorer construction, or a less desirable location. The higher the class, the more expensive and in demand the investment property. With class “A” properties, you typically see a lower ROI. While you may get higher returns with the lower classes, they are also a riskier investment, as the property is less enticing to the market. In addition, lower class properties commonly require greater upkeep and renovations. As such, class “B” and “C” income property may be the wisest choices for new investors, striking a balance between risk and return.
The various laws set forth by the ruling municipality as to the end use of a certain piece of property. They dictate the criteria for design, materials and types of improvements allowed.
The landlord lists, in detail, the building standard materials and costs necessary to make the premises suitable for occupancy. A negotiated allowance is then provided for the tenant to customize or upgrade materials.
The capitalization rate, often referred to as the cap rate, refers to the net operating income (NOI) divided by an income property’s sale price (or asking price – whichever figure is lower). A cap rate can be used to help figure out your potential return on investment before factoring in potential mortgage financing. Typically, a low cap rate comes with a higher price point and less risk than a higher one.
Cash flow is the flow of money in and out of a business, or in the case of a property, it’s rent generated by the monthly rent collected vs. the monthly expenses (taxes, HOA fees, mortgages, etc.). When investing in real estate, most investors look for a positive cash flow from a property.
A cash flow property is an investment property that generates a surplus of money each month after all expenses have been paid. Cash flow properties are highly sought after by investors.
Cash on Cash Return (CoC) is perhaps one of the easiest and most popular metrics used by commercial real estate investors. CoC is used to measure the ratio between an asset’s annual cash flow in relation to the commercial property’s down payment. CoC is generally calculated before taxes.
Commercial real estate is defined in opposition to residential real estate. The definition of commercial properties encompasses industrial properties, medical facilities, office buildings, retail centers, and multifamily complexes. It can also refer to land that will be developed into a commercial project in the future.
Debt coverage ratio (DCR), sometimes known as the debt service coverage ratio (DSCR), compares an investment property’s NOI with its debt service. Lenders use this ratio to calculate whether or not you will be able to generate enough income to pay your debts. Most commercial lenders require a DCR of 1.15-1.35 times the NOI/annual debt service.
Equity is essentially how much the stake in ownership on a property is worth; it is the difference between the current market value of a property and the amount owned by the owner on a mortgage (if any). As a mortgage gets paid off the owner’s equity grows.
When a property is sold, the equity is the difference between the purchase price and the sale price. The market drives the property’s equity but improving and upgrading the property can increase it.
The IRR of an investment is the point at which the net value of investment expenses equals the net value of asset income. These are both calculated at the current value of the investment and not the purchased or future value of the property.
The internal rate indicates at what point an investment could be considered profitable. If an IRR is above a pre-defined number it is an acceptable investment. It also establishes the growth potential of an investment.
IRA investing refers to using your IRA or retirement account to invest in property. Returns on property purchased with an IRA are generally tax-deferred. However, returns must go back into the IRA account, and cannot be spent prior to retirement.
IRA investing allows people to transfer funds to a self-directed IRA to purchase real estate. It also is possible to obtain a mortgage using the funds in an IRA account, so any type of investment property that you might ordinarily purchase with cash or a mortgage can also be purchased using an IRA.
A structure that contains prefabricated components and is put together by a contractor.
A wall-like structure that supports roof rafters.
An old-fashioned wiring system that has been replaced by fuses and circuit breakers.
A leasing fee is paid to the property manager when they sign a lease with a new tenant. If a tenant renews their lease there is a re-leasing fee.
A leveraged return is the return calculated on an investment that takes advantage of a mortgage. It is calculated by subtracting the expenses incurred by the property (including the interest payment on the mortgage) from the income produced by the property and dividing that by the initial investment amount.
Calculation: Income – expenses (including interest payment) / initial investment amount
This differs from the cash on cash return because it includes the principal pay down as part of the return.
While slightly riskier, using leverage is advantageous to investors as it provides higher returns, enables them to diversify across multiple properties.
When considering how to invest in real estate, one term you may see come up again and again is loan to value ratio (LTV). The LTV is determined by what percentage an asset’s sale price or value is attributed to financing. Income property lenders perceive as lower risk are assigned a higher LTV.
Net operating income is an essential idea you need to get to grips with to be successful in your commercial real estate investments. Net operating income (NOI) refers to the income you generate annually from an income property, after property expenses have been taken into consideration.
Aside from rent, you may also generate other income from your commercial space, such as parking or laundry. Property expenses refer to any expenses that enable you to run and maintain an income property, such as utility, property management fees, and property tax. NOI does not include loan payments, depreciation, amortization, or capital expenditures. Your NOI is calculated before tax.
Lenders compute qualifying ratios to determine how much a potential buyer can borrow.
A Victorian-era style that originated in San Francisco.
A document that releases a party from any interest in a piece of real estate.
A Real Estate Owned or REO property is one owned by a lender, usually a bank. Lenders generally only take title of properties after an unsuccessful selling attempt at a foreclosure auction. Lenders often attempt to remove any liens or extraneous expenses before trying to sell the property. REO properties can often be purchased below market value making them a great interest to investors.
Rehabilitation refers to the repairs that need to be done to make an asset tenant-ready. Prior to purchase, properties are given a primary inspection by our ILMs to ensure that extensive repairs are not necessary.
Rehabilitation can include minor fixes such as paint and lighting upgrades but can also extend to more large-scale repairs such as roof replacement and plumbing upgrades. Should such large-scale upgrades be necessary, the investor will be notified prior to purchase and can choose to forego the purchase. Rehabilitation costs are generally included in the purchase price.
Turn-key Properties are rent-ready, and do not need any rehabilitation.
A real estate investment trust (REIT) refers to a corporation that owns or finances income property. REITs function similarly to stocks. Shares in investment property are bought and investors receive dividends on the rent payments collected by the property management companies that own the property.
REITs are an inviting investment choice for many commercial real estate investors as they offer the potential for sizeable returns on investments. However, REITs also come with a certain level of risk, as they are vulnerable to share price volatility. As such, many savvy investors diversify their commercial real estate portfolios – outright buying property and mixing and matching with REIT investments.
Remote investing empowers investors to own property that is geographically removed from their own primary residence. Traditionally real estate investors tend to purchase property that is “in their backyard” so they can keep an eye on their investment. This generally means that the investor is also a landlord and must keep up with the daily maintenance of the property.
Remote investors purchase property in areas that have favorable returns. Remote investing allows investors to take advantage of lower property costs or higher rents that may not be available near their primary residence.
Retail investors, also know as an individual investors or small investors are investors that buy and sell investment assets for their personal account. Retail investors are defined in opposition to institutional investors. Retail investors generally invest at significantly lower amounts than institutional investors.
Return on investment (ROI) stands for the calculated benefit of an investment (called the return), divided by its cost. Your ROI is impacted by several variables, such as renovation and maintenance costs, and how much you originally borrowed in order to invest in your property.
A SDIRA or Self Directed Individual Retirement Account is type of account that provides tax benefits to money deposited for retirement. Any income from the account is taxed at the tax bracket the account holder reaches upon retirement, which is often much lower than their pre-retirement tax bracket.
The only difference between a SDIRA and a typical IRA account is the type of investments the account holder is permitted to make. In addition to traditional stocks and bonds a SIDRA can be used to invest in alternative investments such as real estate, tax liens, and notes.
The money in the account can be invested just as the funds in any standard account can as long as the dividends are returned to the account. Funds cannot be accessed until the account holder reaches retirement. Additionally, all asset expenses must be paid for using funds from the account.
A SDIRA has the ability to hold a mortgage though the terms differ from traditional mortgages. This loan, called a non-recourse loan, is often at a higher rate than a traditional mortgage. It does allow investors to leverage their funds to create a greater ROI.
A single family rental, or SFR is a free-standing residential property designed to house one family that was purchased by an investor and rented to a tenant. SFRs are defined in opposition to a multi-family property, though properties up to a fourplex are sometimes classified as SFRs as well. Properties with more than four units are defined as multi-family properties. Single family properties generally appeal to families, so from an investment perspective, can be seen as more stable. Families tend to want to stay in one place for longer, especially when they have children.
The Solutions Managers have a number of functions, including: assessing investors’ investment goals, guiding them to assets that meet those goals, facilitating the interaction between ILMs and clients, and overseeing the entire investment process.
A turnkey property, or TKP is a property that has been purchased, rehabbed and rented to a tenant and is now for sale to another investor. Turnkey properties usually cash flow from the moment the investor purchases it since the property is already rented.
The money that investors set aside to prepare for future vacancy is called a vacancy provision. It is a percentage of the monthly rent. The average vacancy provision is 6% for vacancy and 6% for maintenance.
The rate of return; the return on an investment or the amount of profit stated as a percentage of the mount invested; the ratio of the annual net income from a property to the cost or market value of the property.
Houses built without space between them and with little or no yard.
Regulations that control the use of land within a jurisdiction.
A one-time modification of existing zoning law.