Glossary of Terms
# A B C D E F G H I J K L M N O P Q R S T U V W X Y Z
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401(k) Plan — An employer-sponsored retirement savings plan in which employees invest part of their pay and avoid current taxes on that income. Employee contributions may be matched by employers, and earnings are not taxed until withdrawn.
A
Absorption Rate: The rate at which available properties are leased or sold in a specific market during a given time period.
Accredited Investor: An individual or entity that meets certain financial criteria, allowing them to invest in private securities offerings.
Acquisition Cost: The total cost incurred to acquire a property, including purchase price, closing costs, and fees.
Affordable Housing: Housing designed to be affordable for individuals or families with low to moderate incomes.
Allocation: The distribution of investment capital among various asset classes, geographic regions, or investment strategies.
Alternative Investments: Investment opportunities outside traditional stocks and bonds, such as real estate, private equity, and hedge funds.
Anchor Tenant: A major tenant in a commercial property, often a well-known retailer, that attracts significant foot traffic.
Ancillary Tenant: A secondary tenant in a commercial property that benefits from the traffic generated by anchor tenants.
Appraisal: A professional assessment of a property’s value, typically conducted by a licensed appraiser.
Appraised Value: The estimated value of a property as determined by an appraisal.
Appreciation: The increase in a property’s value over time due to market conditions, improvements, or other factors.
Asset Class: A category of investment, such as multifamily, office, retail, or industrial properties.
Assets Under Management (AUM): The total market value of assets that an investment manager oversees on behalf of clients.
B
Basis Point: A unit of measurement equal to 0.01%, commonly used to denote changes in interest rates or investment returns.
Build-to-Rent: A real estate development strategy focused on constructing residential properties specifically for rental purposes.
C
CAGR (Compound Annual Growth Rate): The mean annual growth rate of an investment over a specified period longer than one year.
Capital: Financial resources used for investment purposes, including funds available for investing in real estate properties.
Capital Gain: The profit realized from the sale of an asset when the selling price exceeds the purchase price.
Capital Gains Tax: A tax on the profit from the sale of an asset.
Capital Stack: The hierarchy of capital invested in a real estate project, typically including senior debt, mezzanine debt, preferred equity, and common equity.
Capitalization Rate (Cap Rate): A metric used to evaluate the potential return on an investment property, calculated by dividing NOI by the property’s value.
Cash Flow: The net amount of cash generated by a property after all expenses and debt service.
Cash-on-Cash Return: A measure of the annual return on the cash invested, calculated by dividing annual pre-tax cash flow by the total cash invested.
Closing Costs: Expenses incurred during the finalization of a real estate transaction, including fees for appraisals, title insurance, and legal services.
Collateral: An asset pledged to secure a loan, which can be seized by the lender if the borrower defaults.
Commercial Real Estate (CRE): Properties used for business purposes, including office buildings, retail centers, and industrial facilities.
Compound Interest: Interest calculated on the initial principal and also on the accumulated interest of previous periods.
Contingent Offer: A purchase offer that is dependent on certain conditions being met, such as financing approval or property inspections.
Core: A low-risk real estate investment strategy focused on high-quality, fully leased properties in prime locations.
Core Plus: A real estate investment strategy targeting properties that are mostly stabilized but offer some opportunity for value enhancement.
D
Debt: Money borrowed to finance a real estate investment, which must be repaid with interest.
Debt Service: The total amount of money required to cover the repayment of interest and principal on a debt for a particular period.
Debt Service Coverage Ratio (DSCR): A measure of a property’s ability to cover its debt obligations, calculated by dividing NOI by total debt service.
Default: Failure to fulfill the legal obligations of a loan, such as missing payments.
Delinquent: A borrower who has failed to make timely payments on a loan.
Demographics: Statistical data relating to the population and particular groups within it, used in market analysis.
Depreciation: The reduction in the value of an asset over time, often used as a tax deduction in real estate.
Development: The process of improving land or buildings to increase their value.
Distressed Property: Real estate that is under foreclosure or being sold by the lender, often at a discounted price.
Distributions: Payments made to investors from the income generated by a property.
Diversification: A risk management strategy that mixes a wide variety of investments within a portfolio.
Downside Protection: Strategies employed to protect an investment from declining in value.
E
Equity: The value of an owner’s interest in a property, calculated as the property’s value minus any debts owed.
Equity Multiple: A metric that shows how much an investor’s money has grown, calculated by dividing total distributions by the total equity invested.
Exit Strategy: A plan for how an investor will realize a return on an investment, such as selling the property or refinancing.
F
Fair Market Value: The estimated price at which a property would sell in a competitive and open market.
Fixed-Rate Mortgage: A mortgage with an interest rate that remains the same for the entire term of the loan.
Foreclosure: The legal process by which a lender takes control of a property due to the borrower’s failure to make payments.
G
General Partner (GP): The party responsible for managing a real estate investment, often contributing a smaller portion of capital but having decision-making authority.
Gross Rent Multiplier (GRM): A simple method to evaluate a property’s investment potential, calculated by dividing the property’s price by its gross rental income.
H
Holding Period: The length of time an investment is held before being sold.
Hospitality Property: Real estate used for lodging purposes, such as hotels and motels.
I
Internal Rate of Return (IRR): A metric used to estimate the profitability of potential investments, representing the annualized rate of return.
Industrial Property: Real estate used for industrial purposes, including manufacturing, production, and storage.
Interest-Only Loan: A loan where the borrower pays only the interest for a set period, after which they begin paying both principal and interest.
K
K-1 (Schedule K-1) — A tax document issued annually to investors in partnerships that shows income, deductions, and other tax items they must report on their personal tax returns.
Key Interest Rates — The specific interest rate that determines bank lending rates and the cost of credit for borrowers. The two key interest rates in the United States are the discount rate and the Federal Funds rate.
L
Leverage: The use of borrowed capital to increase the potential return of an investment.
Limited Partner (LP): An investor who contributes capital to a real estate investment but does not have a role in management.
Loan-to-Value Ratio (LTV): A financial term used by lenders to express the ratio of a loan to the value of an asset purchased.
M
Market Value: The estimated amount for which a property should exchange on the date of valuation between a willing buyer and seller.
Mezzanine Financing: A hybrid of debt and equity financing that gives the lender the right to convert to an equity interest in case of default.
Multifamily Property: A residential building that contains more than one housing unit, such as apartments or condominiums.
N
Net Worth — The value of person’s or company’s total assets minus all debts or liabilities. It can be negative if someone owes more than they have in money or other assets.
Nominal Interest Rates — The rates of interest, paid to a loan or earned through a deposit. When borrowing, it is known as the Annual Percentage Rate (APR) that lenders usually advertise. In this situation, borrowers should also consider the effective rate. When investing, investors should consider inflation and the real rate of return.
Net Present Value (NPV)
The value of future cash flows discounted to the present, minus the initial investment. Positive NPV = potentially profitable.
Non-Recourse Loan
A type of loan where the lender’s only option in case of default is to seize the collateral (the property), not the borrower’s personal assets.
Non-Traded REIT
A real estate investment trust not listed on public exchanges. Typically more illiquid and long-term than publicly traded REITs.
O
Occupancy Rate
The percentage of a property’s rentable space that is currently leased. High occupancy = good, usually.
Offering Memorandum (OM)
A document provided to prospective investors detailing an investment opportunity, including risks, returns, and structure.
Opportunity Zone
A federally designated area where investors can receive tax advantages for investing in real estate or businesses.
Operating Agreement
A legal document outlining ownership roles, responsibilities, profit distribution, and decision-making protocols in a real estate partnership.
Operating Expenses
Ongoing costs associated with running a property, such as maintenance, utilities, insurance, and management fees.
P
Pari Passu
Latin for “equal footing.” Refers to a distribution method where all investors are paid proportionally.
Passive Income
Earnings from a rental property or real estate investment in which the investor is not actively involved.
Payout Waterfall (Equity Waterfall)
A tiered structure for how profits are distributed among investors and sponsors based on performance.
Portfolio Diversification
Investing in a variety of asset types, locations, or strategies to reduce overall risk.
Preferred Equity
A hybrid investment sitting between debt and common equity. Investors get paid before common equity holders, but usually have limited upside.
Preferred Return
The minimum return paid to equity investors before profits are shared with the sponsor.
Private Placement Memorandum (PPM)
A legal document provided to prospective investors, detailing the terms of a private investment offering.
Pro Forma
A projection of a property’s financial performance, used to estimate returns and evaluate investment viability.
Q
Qualified Opportunity Fund (QOF)
An investment vehicle set up to invest in Opportunity Zones to receive tax benefits.
R
Recapitalization
The restructuring of a property’s capital stack—often used to refinance debt or bring in new equity partners.
Recourse Loan
A loan where the lender can pursue the borrower’s personal assets if the collateral doesn’t cover the debt.
REIT (Real Estate Investment Trust)
A company that owns or finances income-producing real estate. Can be public or private.
Rent Roll
A document showing all of the current tenants in a property, their lease terms, and rent amounts.
Return on Investment (ROI)
A measure of the gain or loss generated relative to the amount of money invested.
Risk-Adjusted Return
A return on an investment adjusted for the level of risk taken to achieve it.
S
Securitization
Pooling real estate loans or assets and turning them into tradable securities.
Sensitivity Analysis
A scenario analysis used to test how changes in assumptions (e.g., rent growth or vacancy) affect investment returns.
Sponsor
The person or firm responsible for sourcing deals, managing the asset, and handling investor relations.
Stabilized Property
A property that is fully leased (or near fully leased) and generating consistent income.
Syndication
A group investment strategy where multiple investors pool capital to invest in real estate, led by a sponsor.
T
Target IRR
The projected internal rate of return an investment aims to deliver to investors.
Tenancy-in-Common (TIC)
A form of shared ownership where each investor holds an undivided interest in a property.
Term Sheet
A non-binding agreement outlining the key terms and structure of a potential investment deal.
Triple Net Lease (NNN)
A lease agreement where the tenant pays property taxes, insurance, and maintenance in addition to base rent.
U
Underwriting
The process of evaluating the financial and operational risk of a real estate investment before acquisition.
V
Vacancy Rate
The percentage of unoccupied units in a property. High vacancy = red flag unless it’s a value-add play.
Value-Add
A property with potential for improved performance via renovations, management changes, or operational improvements.
W
Weighted Average Cost of Capital (WACC)
The average rate of return a company must pay to finance its assets, weighted between debt and equity.
X
xIRR — A version of Internal Rate of Return (IRR) used when cash flows occur at irregular intervals. Commonly calculated using Excel’s XIRR function for real estate modeling.
Y
Yield
The income return on an investment, usually expressed as a percentage of the property’s cost or value.
Yield on Cost
Similar to cap rate, but uses the total project cost (including improvements) instead of market value.