Introduction
If you're new to real estate investing, it can feel like experienced investors are speaking a completely different language.
You'll hear conversations like:
"I bought it at 60% of ARV with a HML, put in $40K CapEx, did a cash-out refi with a DSCR loan at 75% LTV, put $15k in my pocket tax-free and my CoC return is still over 20%."
To a beginner, that sounds like a secret code.
This guide covers the most common terminology used in both Fix-and-Flip investing and BRRRR investing.
Common Investment Strategies
Fix and Flip
A strategy where an investor purchases a distressed property, renovates it, and sells it for a profit.
Example:
- Purchase Price: $120,000
- Repairs: $40,000
- ARV: $250,000
After renovation and resale, the investor earns the difference after expenses. In this example, investor will earn about $40,000 - $50,000 If he/she hits their performance goals (yes, there are more numbers to consider)
BRRRR - Buy, Rehab, Rent, Refinance, Repeat
A strategy where investors:
- Buy a distressed property
- Rehab
- Rent
- Refinance
- Repeat
Investors can build large rental portfolios using this strategy.
Buy and Hold
Purchasing rental property for long-term cash flow and appreciation.
Property Valuation Terms
ARV - After Repair Value
The projected market value after renovations are completed. ARV is the most important number in real estate investing.
Example:
A house worth $120,000 today may have an ARV of $250,000 after repairs.
FMV- Fair Market Value
The price a willing buyer and seller would agree upon in an open market. Could be before repairs or after repairs.
CMA - Comparative Market Analysis
An estimate of value based on recent comparable sales.
Comps
Comparable properties that recently sold, and/or currently on the market, that help determine value. Sold comps will determine potential value. Active for salle comps will define the current market competition.
Good comps will typically be:
- Similar size
- Similar age
- Similar condition
- Same neighborhood
- Sold recently
Price Per Square Foot
Formula:
Price ÷ Square Footage
Example:
$250,000 ÷ 2,000 SF = $125/SF
Deal Analysis Terms
MAO - Maximum Allowable Offer
The maximum amount an investor should offer for a property.
Typical formula:
ARV × 70% - Repairs – Closing Costs
Example:
- ARV = $300,000
- Repairs = $40,000
- Closing Costs = $10,000 (loan fees, title fees, insurance, etc – all costs)
$300,000 × 70% = $210,000
$210,000 - $40,000 - $10,000 = $160,000 MAO
ROI - Return on Investment
Measures profitability.
Formula:
Profit ÷ Investment
CoC Return
Cash-on-Cash Return
Measures annual cash flow compared to actual cash invested.
Formula:
Annual Cash Flow ÷ Cash Invested
Equity
The difference between property value and debt owed.
Example:
Property Value = $300,000
Mortgage Balance = $200,000
Equity = $100,000
Spread
The difference between purchase cost + rehab cost and resale value. The larger the spread, the larger the potential profit.
Exit Strategy
How the investor plans to make money.
Common exits include:
- Retail sale (cash or financed)
- Rental
- Seller finance
- Wholesale
- Wholetail (fix major issues then sell to newer investor that is afraid big rehabs
- Subject-to
- Lease option
Financing Terms
LTV - Loan-to-Value
Formula:
Loan Amount ÷ Property Value
Example:
$150,000 Loan
$200,000 Value
LTV = 75%
LTC - Loan-to-Cost
Formula:
Loan Amount ÷ Total Project Cost
CLTV - Combined Loan-to-Value
Includes all loans secured by the property.
DSCR - Debt Service Coverage Ratio
A relationship between rent and the loan payment.
Formula:
Rent ÷ Debt Service
Most lenders want a DSCR of 1.0 to 1.25
NOI - Net Operating Income
Income remaining after operating expenses but before debt payments.
Formula:
Rental Income - Operating Expenses
PITI - Principal, Interest, Taxes, Insurance
Interest Only
Loan payments cover interest but no principal, taxes or insurance. Typical with hard money loans.
Amortization
The schedule used to pay off a loan over time. Each payment has a principal portion
Balloon Payment
A large remaining balance due at a future date.
Example:
30-Year Amortization with a 5-Year Balloon
Payments are based on a 30-year loan but the remaining principal balance is with the 60th payment (5 years)
Hard Money Lending Terms
HML - Hard Money Loan
Short-term loan secured by real estate. Popular among flippers.
Points
Loan origination fees charged by lenders.
One point equals 1% of the loan amount.
Example:
$100,000 Loan
1 Point = $1,000
Draw
A reimbursement or advance for rehab work. Typically funded in stages.
Repair Reserve or Repair Escrow
Funds held by lender for renovation expenses. Typically released in draws.
Seasoning
Length of ownership required before refinancing.
Bridge Loan
Short-term financing used until new financing is obtained.
Example:
A Hard Money Loan to rehab a property then refinance to Long-term financing. The HML loan is the bridge to a long-term loan. BRRRR Method uses bridge loans.
BRRRR Investing Terms
Stabilized Property
A property that is fully renovated and occupied.
Cash-Out Refinance
Refinancing to pull equity from a property. Common during the "Refinance" stage of BRRRR.
Rent Roll
A document showing:
- Tenants
- Rent amounts
- Lease terms
- Occupancy
Occupancy Rate
Percentage of units occupied.
Formula:
Occupied Units ÷ Total Units
Contractor and Rehab Terms
CapEx - Capital Expenditures
Major improvements that increase property value.
Examples:
- Roof
- HVAC
- Foundation
- Plumbing
Scope of Work (SOW)
Detailed description of repairs needed.
Punch List
“To-Do” list for repairs. Could be for a draw or could be for project completion.
GC - General Contractor
Person responsible for managing renovation work.
Change Order
Written approval for additional work not included in the original contract.
Permit
Government (city, county, state or federal) approval required for certain construction projects.
Holding Costs
Costs incurred while owning the property.
Examples:
- Interest
- Taxes
- Insurance
- Utilities
- Lawn maintenance
Rental Property Terms
Cash Flow
Income remaining after all expenses.
Positive cash flow means the property generates income.
Vacancy Rate
Percentage of time a property sits empty.
Make-Ready
Preparing a rental for move-in.
Includes:
Section 8
Government-assisted housing program administered by local housing authorities.
Lease-Up
The process of filling vacant units in a portfolio or multi-family.
Property Management
Oversight of rental operations.
Includes:
- Rent collection
- Maintenance
- Tenant screening
Wholesaling Terms
Assignment
Selling your contract rights to another buyer.
Assignment Fee
Profit earned from assigning a contract.
Transactional Funding for Double Closing
Funds provided for purchasing and reselling a property on the same day or within a very short period.
EMD - Earnest Money Deposit
Deposit made to demonstrate commitment to a purchase.
End Buyer
Buyer ultimately purchasing the property from an investor.
Marketing Terms
Driving for Dollars
Finding distressed properties by driving neighborhoods.
Absentee Owner
Owner who does not live in the property. A common target for investor marketing.
Probate Lead
Property owned by a deceased person's estate.
Pre-Foreclosure
Property where a foreclosure in looming. Typically owner is behind on payments.
Motivated Seller
Property owner willing to sell at a discount due to circumstances.
Examples:
- Divorce
- Probate
- Job relocation
- Financial distress
- Tired Land;ord
- Etc, etc
Real Estate Investor Vocabulary
Distressed Property
Property needing significant repairs or facing financial hardship.
Value Add
Improvement that increases income or value.
Forced Appreciation
Increasing value through improvements rather than market appreciation.
Sweat Equity
Value created through personal labor.
Exit
How an investor plans to profit from the property.
Founded in 2004, Jet Lending has been a very active lender in the Texas Investing community for more than 24 years. Steve Skillern is a Loan Officer with Jet Lending. He can be reached at 2810768-4752 or emailed at sskillern@jetlending.com.
