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.
A strategy where an investor purchases a distressed property, renovates it, and sells it for a profit.
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)
A strategy where investors:
Investors can build large rental portfolios using this strategy.
Purchasing rental property for long-term cash flow and appreciation.
The projected market value after renovations are completed. ARV is the most important number in real estate investing.
A house worth $120,000 today may have an ARV of $250,000 after repairs.
The price a willing buyer and seller would agree upon in an open market. Could be before repairs or after repairs.
An estimate of value based on recent comparable sales.
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:
Formula:
Price ÷ Square Footage
Example:
$250,000 ÷ 2,000 SF = $125/SF
The maximum amount an investor should offer for a property.
Typical formula:
ARV × 70% - Repairs – Closing Costs
Example:
$300,000 × 70% = $210,000
$210,000 - $40,000 - $10,000 = $160,000 MAO
Measures profitability.
Formula:
Profit ÷ Investment
Measures annual cash flow compared to actual cash invested.
Formula:
Annual Cash Flow ÷ Cash Invested
The difference between property value and debt owed.
Example:
Property Value = $300,000
Mortgage Balance = $200,000
Equity = $100,000
The difference between purchase cost + rehab cost and resale value. The larger the spread, the larger the potential profit.
How the investor plans to make money.
Common exits include:
Formula:
Loan Amount ÷ Property Value
Example:
$150,000 Loan
$200,000 Value
LTV = 75%
Formula:
Loan Amount ÷ Total Project Cost
Includes all loans secured by the property.
A relationship between rent and the loan payment.
Formula:
Rent ÷ Debt Service
Most lenders want a DSCR of 1.0 to 1.25
Income remaining after operating expenses but before debt payments.
Formula:
Rental Income - Operating Expenses
Loan payments cover interest but no principal, taxes or insurance. Typical with hard money loans.
The schedule used to pay off a loan over time. Each payment has a principal portion
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)
Short-term loan secured by real estate. Popular among flippers.
Loan origination fees charged by lenders.
One point equals 1% of the loan amount.
Example:
$100,000 Loan
1 Point = $1,000
A reimbursement or advance for rehab work. Typically funded in stages.
Funds held by lender for renovation expenses. Typically released in draws.
Length of ownership required before refinancing.
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.
A property that is fully renovated and occupied.
Refinancing to pull equity from a property. Common during the "Refinance" stage of BRRRR.
A document showing:
Percentage of units occupied.
Formula:
Occupied Units ÷ Total Units
Major improvements that increase property value.
Examples:
Detailed description of repairs needed.
“To-Do” list for repairs. Could be for a draw or could be for project completion.
Person responsible for managing renovation work.
Written approval for additional work not included in the original contract.
Government (city, county, state or federal) approval required for certain construction projects.
Costs incurred while owning the property.
Examples:
Income remaining after all expenses.
Positive cash flow means the property generates income.
Percentage of time a property sits empty.
Preparing a rental for move-in.
Includes:
Government-assisted housing program administered by local housing authorities.
The process of filling vacant units in a portfolio or multi-family.
Oversight of rental operations.
Includes:
Selling your contract rights to another buyer.
Profit earned from assigning a contract.
Funds provided for purchasing and reselling a property on the same day or within a very short period.
Deposit made to demonstrate commitment to a purchase.
Buyer ultimately purchasing the property from an investor.
Finding distressed properties by driving neighborhoods.
Owner who does not live in the property. A common target for investor marketing.
Property owned by a deceased person's estate.
Property where a foreclosure in looming. Typically owner is behind on payments.
Property owner willing to sell at a discount due to circumstances.
Examples:
Property needing significant repairs or facing financial hardship.
Improvement that increases income or value.
Increasing value through improvements rather than market appreciation.
Value created through personal labor.
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.