Real Estate Investing Terms, Explained

Investment property terms and formulas - cap rate, NOI, cash flow, DSCR, IRR, BRRRR, 1031 exchanges and more.

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Cap Rate
Cap rate estimates a rental property's annual return based on its net operating income relative to its price or value, before financing costs.
Net Operating Income
Net operating income is a property's total income from rent and other sources, minus operating expenses, before accounting for debt service (mortgage payments).
Cash Flow
Cash flow is the money left over from a rental property's income after paying all operating expenses and debt service — positive cash flow means the property generates more than it costs to run and finance.
Cash-on-Cash Return
Cash-on-cash return measures the annual pre-tax cash income a property generates relative to the actual cash invested — typically the down payment, closing costs, and any upfront renovation spend.
DSCR
DSCR compares a property's net operating income to its debt payments, showing whether rental income alone covers the mortgage — lenders use it to qualify borrowers for DSCR loans, which don't require personal income verification.
BRRRR
BRRRR is an investment strategy where an investor buys a distressed property, renovates it, rents it to tenants, refinances based on the improved post-renovation value, and uses the cash-out equity to fund the next purchase.

Step by step

All 56 terms

  • 1% RuleIntermediate

    The 1% rule is a quick rental-investing screening test: a property's monthly rent should be at least 1% of its purchase price for the deal to be worth a closer look.

  • A 1031 exchange lets a real estate investor defer capital gains tax by reinvesting the proceeds from a sold property into a "like-kind" replacement property, within strict IRS timelines.

  • 70% RuleIntermediate

    The 70% rule is a fix-and-flip screening formula: an investor should pay no more than 70% of a property's after-repair value, minus estimated repair costs.

  • An accredited investor is an individual who meets SEC-defined income or net worth thresholds, qualifying them to invest in private real estate syndications and other securities not registered for the general public.

  • AFFO refines FFO further by subtracting recurring capital expenditures and leasing costs needed to maintain the properties — intended to approximate the cash actually available to distribute to shareholders, often shown per share as "AFFO per share."

  • After-repair value (ARV) is the estimated market value of a property after all planned renovations or repairs have been completed.

  • Asset repositioning is the process of renovating, re-tenanting, or re-marketing an underperforming commercial property to raise its rents, occupancy, or market perception — and, with it, its value.

  • An assignment of contract transfers a wholesaler's rights and obligations under a purchase agreement to a new end buyer, in exchange for an assignment fee — the mechanism most wholesale deals use to close.

  • BRRRR is an investment strategy where an investor buys a distressed property, renovates it, rents it to tenants, refinances based on the improved post-renovation value, and uses the cash-out equity to fund the next purchase.

  • Buy and HoldIntermediate

    Buy and hold is a long-term investment strategy where an investor purchases a rental property and holds it for years, earning income from rent and building wealth through appreciation and equity.

  • Cap rate estimates a rental property's annual return based on its net operating income relative to its price or value, before financing costs.

  • A CapEx reserve is money set aside from rental income to cover eventual big-ticket replacements — roof, HVAC, water heater — that don't happen every year but are certain to happen eventually.

  • Carried interest, or "the promote," is the share of profits a general partner earns for managing a real estate syndication, on top of their own equity investment — typically earned only after limited partners receive their preferred return.

  • Carrying costs are the ongoing expenses of owning and holding a property before it produces income or is resold — property taxes, insurance, loan interest, utilities, and HOA fees.

  • Cash FlowIntermediate

    Cash flow is the money left over from a rental property's income after paying all operating expenses and debt service — positive cash flow means the property generates more than it costs to run and finance.

  • A cash flow waterfall is the agreed order in which a syndication's profits are distributed — typically returning capital and a preferred return to limited partners first, before splitting remaining profit between the GP and LPs.

  • Cash-on-cash return measures the annual pre-tax cash income a property generates relative to the actual cash invested — typically the down payment, closing costs, and any upfront renovation spend.

  • Cost segregation is a tax strategy that breaks a property's cost into components with shorter depreciation lives — like carpeting, fixtures, or parking lots — allowing an investor to front-load depreciation deductions instead of spreading them evenly over 27.5 or 39 years.

  • Debt ServiceIntermediate

    Debt service is the total amount of principal and interest owed on a loan over a given period, most often expressed as an annual figure in real estate investment analysis.

  • Debt YieldAdvanced

    Debt yield measures a property's net operating income against the loan amount, giving lenders a cap-rate-like risk metric that isn't affected by interest rates or amortization terms.

  • Depreciation recapture is a tax owed when a depreciated rental property is sold — the IRS taxes the portion of the gain equal to depreciation previously deducted at a separate rate, since that depreciation reduced taxable income while the property was held.

  • A double closing is a wholesale strategy where the wholesaler briefly takes actual title to a property in one closing, then immediately resells it to the end buyer in a second closing — used instead of an assignment when the fee needs to stay confidential or the contract restricts assignment.

  • DSCR compares a property's net operating income to its debt payments, showing whether rental income alone covers the mortgage — lenders use it to qualify borrowers for DSCR loans, which don't require personal income verification.

  • A Delaware Statutory Trust is a legal structure that lets multiple investors each own a fractional, passive interest in a larger property, while still qualifying as "like-kind" real estate for a 1031 exchange.

  • Equity multiple measures total cash an investor receives back over the life of an investment relative to what they put in, expressed as a multiple rather than an annualized rate like IRR.

  • FFO is a standard REIT profitability metric that adds depreciation and amortization back to net income and removes gains or losses from property sales — designed to better reflect real estate cash flow than GAAP net income, since real estate depreciation rarely matches actual value decline.

  • Fix and FlipIntermediate

    A fix and flip is a real estate investment strategy where an investor buys a property below market value, renovates it, and resells it for a profit, typically within months.

  • The general partner is the party that sources, acquires, and actively manages a real estate syndication's investment — typically taking on legal liability and earning fees plus a carried-interest profit share for doing so.

  • GRM is a quick screening ratio that compares a property's price to its gross annual rental income, before any expenses are subtracted.

  • Gross rental income is a property's total rental income before subtracting vacancy, operating expenses, or debt service — the starting point for calculating NOI.

  • House HackingIntermediate

    House hacking means buying a multi-unit or single-family property, living in part of it, and renting out the rest — using rental income to offset or fully cover the owner's own mortgage payment.

  • IRR is the annualized rate of return an investment is expected to generate over its full holding period, accounting for the timing and size of all cash flows — including the eventual sale.

  • LeverageIntermediate

    Leverage means using borrowed money (a mortgage) to control a larger asset than an investor could afford with cash alone — it can amplify both returns and losses.

  • A limited partner is a passive investor in a real estate syndication who contributes capital but isn't involved in day-to-day management, with liability generally limited to the amount they invested.

  • MAO is the highest price an investor should pay for a fix-and-flip property to hit their target profit, calculated from the after-repair value, renovation costs, and desired margin.

  • Net operating income is a property's total income from rent and other sources, minus operating expenses, before accounting for debt service (mortgage payments).

  • Operating ExpensesIntermediate

    Operating expenses are the recurring costs of running a rental property — property taxes, insurance, maintenance, management fees, and similar costs — not including mortgage payments.

  • A passive activity loss is a tax loss from rental real estate or other activities an investor doesn't materially participate in — IRS rules generally limit deducting these losses against non-passive income like a salary, unless the investor qualifies as a real estate professional.

  • A preferred return is a minimum annual return — commonly 6-8% — that limited partners in a real estate syndication must receive before the general partner earns any profit share (promote).

  • A property management fee is what a landlord pays a property manager to handle leasing, rent collection, maintenance coordination, and tenant issues, typically 8-12% of monthly collected rent.

  • A Qualified Opportunity Fund is an investment vehicle that channels capital gains into designated Opportunity Zones in exchange for federal capital gains tax deferral and, if held long enough, potential exclusion of gains on the new investment.

  • A real estate capitalization ("cap") table is a schedule showing every investor in a real estate syndication or fund, their ownership percentage, capital contributed, and their position in the deal's profit-distribution waterfall.

  • Real estate professional status is an IRS tax classification for taxpayers who spend more than 750 hours a year and over half their working time materially participating in real estate activities — qualifying them to deduct rental losses against ordinary income without the usual passive-loss limits.

  • A real estate syndication pools capital from multiple passive investors (limited partners), managed by a sponsor (general partner), to acquire a property too large for any single investor to buy alone.

  • A REIT is a company that owns, operates, or finances income-producing real estate and trades on public markets like a stock, letting investors gain real estate exposure without buying property directly.

  • Rent ControlIntermediate

    Rent control refers to local laws limiting how much and how often a landlord can raise rent on existing tenants, and in some jurisdictions restricting eviction reasons.

  • Rental YieldIntermediate

    Rental yield measures a property's annual rental income as a percentage of its value or purchase price — similar to cap rate, but sometimes calculated using gross income rather than NOI.

  • Return of capital is a distribution to investors that represents giving back part of their original invested capital, rather than paying out taxable profit or income.

  • ROI measures the total profit from an investment relative to its cost, expressed as a percentage — a general-purpose metric used across real estate and other investment types.

  • Section 8 is a federal rental assistance program where the government pays a portion of a qualifying tenant's rent directly to a participating landlord.

  • A short-term rental is a property rented out for brief stays — typically under 30 days, as on Airbnb or Vrbo — as opposed to a traditional lease, often generating higher nightly income but with more variable occupancy and higher management effort.

  • Tenancy in CommonIntermediate

    Tenancy in common lets two or more people own a property together in unequal or equal shares, each free to sell or will their share independently — with no automatic right of survivorship to the other owners.

  • Turnkey RentalIntermediate

    A turnkey rental is a fully renovated, already-tenanted (or rent-ready) investment property sold with the intent that a buyer can start collecting rent with minimal additional work — often paired with third-party property management.

  • Vacancy RateIntermediate

    Vacancy rate is the percentage of time a rental property (or a market of rentals) sits unoccupied and not generating rental income, used to estimate realistic effective income.

  • Wholesaling is a strategy where an investor puts a property under contract at a below-market price, then assigns or sells that contract to an end buyer for a fee — without ever taking ownership of the property themselves.

  • Yield on cost — also called return on cost, unlevered yield on cost, or untrended return on cost — measures a development or value-add project's projected stabilized net operating income against its total project cost (land, hard costs, soft costs, and financing).

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Definitions are provided for general educational purposes and are not financial, legal, tax, or real estate advice. Rules vary by transaction and location - verify important decisions with qualified professionals.