Key Terms Every Landlord & Investor Should Know
1% Rule (Rental Properties): A calculation to determine whether an investment property’s cash flow makes it a good buy. To run the 1% rule on a property, calculate 1% of the property’s purchase price to determine the minimum monthly rent to charge.
50% Rule (Rental Properties): A purchase criteria commonly used by real estate investors when analyzing rental properties. According to this rule, the operating expenses of a rental property should be less than or equal to 50% of its operating income.
70% Rule (House Flips): A purchase criteria commonly used by real estate investors when analyzing flips and rehab projects. According to this rule, the purchase price of a property you're flipping should be less than or equal to 70% of its after repair value (ARV), minus the rehab costs you expect to have.
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A
Accelerated Depreciation: Accelerated depreciation allows real estate investors to deduct a larger portion of an asset’s value in the earlier years of ownership compared to its later years. This can reduce taxable income in the early years of property ownership and increase cash flow, which can be reinvested to grow the rental business faster.
Acquisition Cost: The total cost of buying an investment property, including mortgage loan fees, closing costs, inspection fees, etc.
After Repair Value (ARV): ARV stands for After Repair Value and is used by real estate investors to estimate the potential value of a property after all repairs and renovations have been completed.
Accessory Dwelling Unit (ADU): ADUs are independent residential facilities located on the same grounds as a main residence. These units can either be attached to an existing home or built as a separate structure. ADUs are designed to function as complete living spaces, equipped with their own sleeping, cooking, and sanitary facilities.
Acquisition Cost: The total cost of buying an investment property, including mortgage loan fees, closing costs, inspection fees, etc.
Amortization: Amortization refers to the amount of principal and interest paid each month over the course of the loan. Even though the mortgage repayment amount is the same each month, the amount going towards the principal starts out small, with the majority of the payment going towards interest.
Annual Depreciation Allowance: The cost of credit expressed as a yearly interest rate. It compares the costs of different loans, such as mortgages and other real estate loans.
Appraisal: The process of determining the value of a property through an independent survey, often required by a lender in order to ensure the money being borrowed is a fair amount for the property.
Appraised Value: The appraised value of a property is determined by an independent survey conducted by a lender and is useful in determining how much money can be borrowed for its purchase and under what terms.
Appreciation: A measure of the estimated increase in value of an asset over a certain time frame.
B
Background Check: A tenant background check provides information that helps landlords determine if an applicant will be a responsible tenant. The main elements of a background check include credit insights, a rental history and eviction report, and a criminal background check.
BRRR Method: A real estate investing strategy. BRRRR is an acronym for Buy, Rehab, Rent, Refinance, Repeat. Using this method, Investors purchase properties that need renovations. They rehab them and rent them out. Then, after they’ve built up equity, they do a cash-out refinance to use their profit on another property.
C
Capital Gains Tax: Capital gains refer to the profit earned from the sale of a real estate investment. The amount of tax paid on this profit is termed capital gains tax.
Capitalization Rate (Cap rate): The cap rate is the NOI divided by the purchase price. The cap rate is an indicator of the risk and return of a property. It tells you the return of an investment before financing costs.
Clear Title: A clear title is a property where there is no dispute over ownership and no lien from creditors.
Cash on Cash Return: The cash return on investment compared to the amount of cash invested. For example, an investment with cash distributions of $50 on a $1,000 investment has a 5% cash-on-cash return.
Cash Flow: The amount of money moving in and out of a business, property, or other cash-generating asset.
Capital Expenditures (CapEx): Large, one-time expenses undertaken to extend the life or add value to a real estate property. These include renovations and upgrades, as well as equipment or supply costs needed to make the improvements.
Comparables / Comparative Market Analysis (CMA): An analysis done to compare similar properties in the same market with the goal of understanding the value of the property and the rent that can be charged.
Common Elements: Shared areas in condos or multi-unit buildings (e.g., elevators, lobbies) maintained by a strata or condo corporation.
Closing Costs: One-off expenses paid by the buyer during the purchase of a property. These include application fees, appraisal costs, attorney fees, closing and courier fees, homeowners insurance, property taxes, mortgage insurance premiums, and underwriting fees.
Commercial Real Estate: Commercial real estate is the purchase and sale of commercial properties, such as office buildings, retail centers, industrial properties, or land to be developed into a commercial project in the future.
Contingent Offer: An offer with a protective clause on behalf of the buyer.
Cash-Out Refinance: A type of new mortgage loan that enables homeowners to pull equity out of their homes.
D
Debt Service Coverage Ratio (DSCR): DSCR measures a borrower's available cash flow to pay its current debt obligations. The DSCR shows investors and lenders whether a borrower has enough income to pay its debts. The ratio is calculated by dividing net operating income by debt service, including principal and interest.
Depreciation: The loss of value of a property over time due to wear and tear.
Down Payment: A down payment is the amount of money you put towards the purchase of a home. Your lender deducts the down payment from the purchase price of your home. Your mortgage covers the rest of the price of the home. The minimum amount you need for your down payment depends on the purchase price of the home. In Canada, if your down payment is less than 20% of the price of your home, you’ll typically need to buy mortgage loan insurance.
Debt-to-Income Ratio: This ratio is used to measure a borrower’s ability to pay back the loan. It compares the monthly minimum debt payment to the borrower’s monthly income.
Duplex: A duplex is a type of residential building that contains two separate housing units within a single structure, making it a popular option for those seeking multi-family living arrangements.
E
Equity: Equity is the difference between the current market value of a property and how much you owe on the mortgage. If you sell a property, the equity is your profit in cash after you’ve paid off the mortgage.
F
FMV (Fair Market Value): The Fair Market Value of a property is what a property would reasonably sell for in the open market without undue pressure to complete a transaction. The FMV of a property allows buyers to ascertain whether they’re paying the right price and sellers to know if they’re leaving money on the table.
FSBO (For Sale by Owner): This is a property that is being sold directly by an owner, without the involvement of a real estate agent or realtor.
Flipping: The process of buying a property, fixing it up or renovating it to increase its market value, and selling it for a profit.
H
Home Inspection: A comprehensive examination of the condition of a property in which the physical structure of the home, such as the roof and the siding, as well as systems, such as plumbing, electrical, and heating and cooling (HVAC), are looked at to find any significant faults.
Home Equity Line of Credit (HELOC): A secured line of credit that uses the equity you have built in your home as collateral.
I
Inspection Contingency: An inspection contingency is a clause put in the agreement to allow the buyer to have the home inspected and negotiate costs or terminate the agreement with the seller based on the results of the inspection.
Internal Rate of Return (IRR): This is the best measure of a property’s performance, used to measure an asset’s long-term profitability. It is defined as the point where the net value of the expenses equals the gross rental income.
Income-Producing Assets: Real estate investments that create passive income for the property owner.
L
Long-Term Rental: A type of rental property where the tenant signs a lease for a longer-term period, typically a year.
Loan-to-Value Ratio (LTV): The loan-to-value ratio is an important calculation to determine the amount of the loan compared to the value of the property. (LTV = Mortgage amount ÷ appraised property value or sale price)
M
Mixed-Use Building: A mixed-use building is a property that’s been zoned for both residential and commercial purposes, such as a family home up stair and ground floor is a convenience store.
Mortgage: A mortgage is the sum of money borrowed from a lender, such as a bank, to purchase a property. Though it can be higher, a mortgage is frequently given for up to 80% of the property’s value.
Management Fee: The Management Fee is an operating expense paid to the operator to cover costs of managing the property operations, like annual accounting, audit, and tax filings.
Multi-Family Home: A multi-family home is a type of residential property, such as an apartment complex, condominium, or a duplex, that has more than one residential unit.
N
Net Cash Flow: This is the Target Cash Flow that will be available to distribute to investors through dividend payments. Net Cash Flow = Rent Payments – Operating Expenses.
Net Operating Income (NOI): Net Operating Income (NOI) is the gross profit of a rental property. It’s calculated as gross rents – all expenses other than interest.
Net Asset Value: The value of a fund’s assets minus the value of its liabilities.
O
Operating Expenses: Operating Expenses include all of the anticipated costs for operating the rental property. Some expenses include Insurance, Property Tax, Vacancy, Maintenance, and Property Management.
Occupancy Rate: The ratio of space rented out or used to the total amount of available space.
P
Pre-Approval: The process a lender uses to determine how much money a borrower can borrow to purchase a home.
Principal: The principal is the amount of money owed on a loan or mortgage, not including the interest.
Property Management: A company that’s paid for by a landlord to oversee the day-to-day repairs, management, and administrative tasks on an investment property.
Purchase Agreement: The legal contract that outlines all the terms and conditions of the sale of a property.
R
Refinance: The process of replacing your existing mortgage with a new one.
Remote Investing: A type of real investment in which investors buy properties outside of their immediate geographical area. These properties are often managed by a property management company.
Real Estate Agent: A licensed professional who assists in real estate transactions.
Rent Control: A term used to describe any legislation that controls rent prices. Rent control laws restrict how much and how frequently rent can be raised. Rent increases can be limited by a flat percentage or an actual price.
Rental Income: Income generated from leasing out a property to tenants who pay to live in it for the term of the lease.
Rent to Own (RTO): Rent to own is a combination of a rental and purchase agreement. With an RTO, the tenant’s monthly payment to the landlord is divided up in a way that part of it goes towards the monthly rent and the remainder towards the purchase price of the house as set out in the agreement.
Return on Investment (ROI): The percentage of invested money that’s made back after subtracting all expenses and costs. (ROI = Investment Gain – Investment Cost) ÷ Investment Cost.
Rental Agreement: A rental agreement is a legally binding contract between a landlord and tenant outlining the terms and conditions for renting a property, including rent, duration, and responsibilities.
S
Single-Family Home (SFH): A type of rental property that is designed for just 1 family to live in. This can be a typical house or townhouse. Duplexes and apartment buildings are considered to be “multi-family” housing because the property can house multiple families.
Short-Term Rental: Also known as a vacation rental, this is a type of property that is leased out for very short periods of time, typically through marketplaces such as Airbnb. Often used by vacationers, the properties are furnished with listed amenities.
T
Tenant Screening: The process of vetting tenants. This typically involves doing due diligence through interviews, background and credit checks, and calling references.
Title Insurance: Title insurance is a type of indemnity insurance. It’s taken out to protect both lenders and homebuyers from financial loss resulting from defects in a title to a property, such as back taxes, liens, and conflicting wills.
Tax Lien: A legal claim against your property when you don’t pay your taxes to the government.
Turnkey Property: A rent-ready property, that is, an investment property that does not require any repairs or renovations to rent out to tenants and is updated to current market standards.
V
Vacation Rental: Furnished apartments, houses, or professionally managed resorts or complexes that are rented out, often to tourists, as an alternative to hotels. These short-term rental properties are stocked with basic amenities, and the stay is usually no more than 30 days.
Vacancy Rate: Vacancy rate is the percentage of all units in a rental property portfolio that are vacant, that is, have no occupancy at any given time.
W
Wholesaling: A real estate investment strategy where a wholesaler gets a contract to sell a distressed property to an investor.
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