Investment Financing Terms
Navigate industry jargon with ease. Explore our comprehensive glossary of terms to better understand your financing journey.
Simplifying Real Estate and Loan Terminology
Whether you’re new to real estate investing or a seasoned professional, understanding the terms used in construction loans and financing is essential. Our glossary provides clear and concise definitions to help you make informed decisions.
Key Terms (A-E)
After-Repair Value (ARV)
The estimated value of a property after renovations or repairs are completed. Investors use ARV to determine potential profit margins in fix-and-flip projects.
Calculation: ARV = Property’s Current Value + Value of Repairs/Improvements
Appreciation
The increase in a property’s value over time due to market demand, economic conditions, or property improvements. Appreciation is a key factor in building equity.
Calculation: Annual Appreciation Rate = (Current Value – Purchase Price) / Purchase Price * 100
Break-Even Ratio (BER)
A financial metric that shows the percentage of income required to cover operating expenses and debt payments. A lower BER indicates a more profitable property.
Calculation: BER = (Operating Expenses + Debt Service) / Gross Operating Income
Bridge Loan
A short-term loan used to bridge the gap between buying and selling properties or securing permanent financing. Bridge loans offer quick access to funds.
Cap Rate
Short for capitalization rate, it measures a property’s return on investment based on the annual net operating income (NOI) divided by the purchase price or current market value.
Calculation: Cap Rate = (Net Operating Income / Property Value) * 100
Cash Flow Before Tax (CFBT)
The total amount of cash generated by a property before accounting for taxes. It includes rental income minus operating expenses and debt payments.
Calculation: CFBT = Gross Income – (Operating Expenses + Debt Service)
Cash Flow Property
A property that generates positive cash flow, meaning rental income exceeds operating expenses and mortgage payments.
Cash on Cash Return (CoC)
A performance metric that calculates the annual cash income earned on the cash invested in a property. It’s expressed as a percentage.
Calculation: CoC = (Annual Pre-Tax Cash Flow / Total Cash Invested) * 100
Comparables (Comps)
Properties with similar characteristics, such as location, size, and condition, used to determine a property’s market value.
Debt Coverage Ratio (DCR)
A measure of a property’s ability to cover its debt obligations with its net operating income (NOI). A DCR greater than 1 indicates that income exceeds debt payments.
Calculation: DCR = Net Operating Income / Debt Service
Debt Service Coverage Ratio (DSCR)
Similar to DCR, DSCR assesses the ability to service debt. A DSCR of 1.2 means a property’s NOI is 20% higher than its debt obligations.
Calculation: DSCR = Net Operating Income / Total Debt Service
Equity
The difference between a property’s market value and the amount owed on the mortgage. Equity grows through mortgage payments and appreciation.
Calculation: Equity = Property Value – Outstanding Loan Balance
Key Terms (F-M)
Gross Operating Income (GOI)
The total rental income a property generates before subtracting operating expenses. It includes all potential income sources, such as rent and fees.
Calculation: GOI = Gross Rental Income + Other Income (e.g., fees)
Gross Rent Multiplier (GRM)
A quick metric for valuing rental properties. It’s calculated by dividing the property’s price by its gross annual rental income.
Calculation: GRM = Property Price / Annual Gross Rental Income
Gross Scheduled Income (GSI)
The total income a property could generate if fully rented, assuming no vacancies or non-paying tenants.
Hard Cost Budget
The budget for tangible construction costs, such as labor, materials, and equipment needed for a project.
IO Payments
Interest-only payments made on a loan where the borrower pays only the interest for a set period, delaying principal repayment.
Leverage Return
The use of borrowed capital to increase the potential return on investment. Leverage amplifies gains but also risks.
Calculation: Leverage Return = (Total ROI with Financing – ROI without Financing)
Loan to Cost (LOC)
The percentage of a project’s total costs financed by a loan. It’s calculated as the loan amount divided by the total project cost.
Calculation: LOC = Loan Amount / Total Project Cost * 100
Loan to Value (LTV)
A ratio that measures the loan amount as a percentage of a property’s appraised value. Lower LTVs indicate lower financial risk.
Calculation: LTV = Loan Amount / Appraised Property Value * 100
Multifamily Property
A residential property designed to house multiple families in separate units, such as duplexes or apartment buildings.
Key Terms (N-Z)
Net Operating Income (NOI)
A property’s total income after operating expenses are subtracted but before debt payments and taxes. It’s a key indicator of profitability.
Calculation: NOI = Gross Operating Income – Operating Expenses
Operating Expenses
The costs associated with maintaining and managing a property, including taxes, insurance, repairs, and utilities.
Operating Expenses Ratio (OER)
A metric that compares operating expenses to gross operating income (GOI). It’s used to measure the efficiency of property management.
Calculation: OER = Operating Expenses / Gross Operating Income * 100
Origination Points
Fees charged by lenders for processing a loan, expressed as a percentage of the loan amount. One point equals 1% of the loan.
Prepayment Penalty
A fee charged to borrowers for paying off a loan early. It compensates lenders for lost interest.
Rehab
Short for rehabilitation, it refers to the process of renovating a property to increase its value or prepare it for sale or rental.
Rehab Holdback
Funds set aside by the lender to be released in stages as renovation milestones are completed
Return on Investment (ROI)
A performance metric that measures the profitability of an investment. ROI is calculated as net profit divided by the initial investment cost.
Calculation: ROI = (Net Profit / Initial Investment) * 100
Scope of Work
A detailed document outlining the tasks, materials, and timeline for a construction or renovation project.
Seasoning
The length of time a borrower has held a property or loan. Some lenders require seasoning periods to reduce risk.
Single Family Rentals (SFRs)
Residential properties rented to individual tenants or families, often considered a stable and scalable investment.
Soft Cost Budget
The budget for non-tangible construction costs, such as permits, architectural fees, and legal expenses.
Tax Lien
A legal claim placed on a property by the government for unpaid taxes. Tax liens must be resolved before selling the property.
Turn Key Property (TKP)
A property that is fully renovated, rented, and managed, allowing investors to generate income immediately after purchase.
Vacancy Provision
An allowance made in financial projections to account for periods when rental units are unoccupied and not generating income.
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