Real estate investing glossary

50 terms, defined the way they are actually used in a deal — with the calculator or guide that puts each one to work.

Where a definition depends on a rule that changes, it says so. Tax and legal terms are described in general; confirm anything consequential with a professional who knows your situation.

1

1031 exchange

A like-kind exchange under Section 1031 that defers capital gains tax when sale proceeds are reinvested in replacement real property within strict deadlines — 45 days to identify and 180 days to close. Debt as well as equity must be replaced, or the shortfall is taxable boot.

A

Absorption

The net change in occupied space over a period. Compared against units under construction, it is the clearest measure of whether a market's new supply is being taken up or is accumulating as vacancy.

Accredited investor

A regulatory category of investor permitted to participate in private offerings, defined by income, net worth or, since 2020, certain professional certifications. Most quality syndications rely on exemptions that limit participation to accredited investors.

After-repair value (ARV)

The estimated market value of a property once renovation is complete. It is an estimate, not a fact, and the gap between an investor's ARV and the appraiser's is where BRRRR and flip deals most often fail.

B

Bonus depreciation

A first-year deduction of the full cost of qualifying property with a recovery period of 20 years or less. Set at 100% by the 2017 tax law, phased down, then restored to 100% permanently by the One Big Beautiful Bill Act for property acquired after 19 January 2025.

Boot

Value received in a 1031 exchange that is not like-kind property — cash taken out, or a reduction in debt that is not replaced. Boot is taxable even when the rest of the exchange qualifies.

Break-even occupancy

The occupancy level at which rental income exactly covers operating expenses and debt service. The distance between your projected occupancy and this figure is one of the clearest measures of how much room a deal has before it is in trouble.

Bridge loan

Short-term, usually floating-rate debt used while a property is repositioned toward permanent financing. Its short term is the risk: the loan matures on schedule whether or not the business plan finished.

BRRRR

Buy, Rehab, Rent, Refinance, Repeat. A strategy of purchasing below market, renovating to raise the appraised value, refinancing to recover the invested capital, and reusing it. It depends entirely on the after-repair appraisal supporting the refinance.

C

Capital expenditure (capex)

Spending on improvements that extend a property's life or add value, capitalised and depreciated rather than deducted in the year incurred. The line between a deductible repair and a capitalised improvement is one of the most consequential distinctions in rental tax treatment.

Capitalization rate (cap rate)

Net operating income divided by purchase price or value, expressed as a percentage. It measures the unlevered yield of a property and deliberately ignores financing, which is what makes it useful for comparing assets and useless for judging your own return.

Cash trap

A loan provision diverting property cash flow to a lender-controlled account when a covenant is breached. It typically triggers during a difficult period, removing exactly the capital needed to fix the problem.

Cash-on-cash return

Annual pre-tax cash flow divided by the total cash invested. It captures the effect of leverage, which cap rate does not, but reflects a single year and ignores appreciation, principal paydown and tax treatment entirely.

Charging order protection

A limitation on a creditor's remedy against an LLC member's interest, restricting them to distributions rather than allowing seizure of the underlying assets. Its strength varies substantially by state.

Concessions

Incentives such as free months or reduced deposits that lower effective rent below asking rent. Because asking rents lag, the appearance or disappearance of concessions is a faster signal of market direction than published rent figures.

Cost segregation

An engineering study that reclassifies components of a building into shorter depreciation lives — typically 5, 7 and 15 years — so they can be deducted sooner. Its value depends heavily on bonus depreciation, which was restored to 100% for qualifying property acquired after 19 January 2025.

D

Debt service coverage ratio (DSCR)

Net operating income divided by annual debt service. A DSCR of 1.25 means the property produces 25% more income than its loan payments require. Lenders set minimums, and because the coupon sits in the denominator, a rate rise reduces DSCR without anything changing at the property.

Debt yield

Net operating income divided by the loan amount. Unlike LTV it does not depend on an appraisal, and unlike DSCR it does not depend on the interest rate — which is why lenders adopted it and why it is frequently the binding constraint on loan proceeds in thin markets.

Delaware statutory trust (DST)

A structure holding fractional interests in real property that can qualify as replacement property in a 1031 exchange. It offers passivity and deadline relief at the cost of control and liquidity.

Depreciation

An annual deduction for the wearing out of a building, taken over 27.5 years for residential rental property and 39 for most commercial. Land is not depreciable. It is the deduction that makes leveraged real estate tax-advantaged, and it is recaptured at sale.

Depreciation recapture

Tax due at sale on the depreciation previously deducted. It is why depreciation is a deferral rather than a permanent saving, and it surprises investors who modelled the deduction but not the exit.

Distribution waterfall

The order in which cash from a deal is paid out — typically a preferred return to limited partners, then return of capital, then a promoted split favouring the sponsor above defined hurdles.

DSCR loan

An investor mortgage underwritten against the property's rental income rather than the borrower's personal income and tax returns. It has become the standard route for investors past the conventional-loan ceiling, and for those whose returns understate their buying power.

Due-on-sale clause

A mortgage provision allowing the lender to demand full repayment if the property is transferred. It is the reason many creative financing structures involving an existing loan carry more risk than they appear to.

E

Effective rent

Rent actually collected over the lease term after concessions, as opposed to the advertised asking rent. Underwriting on asking rent in a market offering two free months overstates income by roughly a sixth.

Emerging market (real estate)

A market where the fundamental drivers of space demand are improving faster than the asset market has priced in. A cheap market and an emerging one look identical on a cap rate screen; only the direction of fundamentals distinguishes them.

Exit cap rate

The cap rate assumed when modelling a future sale. Underwriting an exit at the same cap rate as the purchase is an assumption rather than a forecast, and cap rate expansion between entry and exit destroyed a large share of deals underwritten in 2021 and 2022.

F

Fair housing

Federal, state and local law prohibiting discrimination in housing. Liability does not require intent, which is why written screening criteria applied identically to every applicant protect a landlord as well as the applicant.

Funds from operations (FFO)

Net income with real estate depreciation added back and gains on property sales removed. Adjusted FFO goes further by subtracting recurring capital expenditure, and is the closer measure of distributable cash.

G

Gross rent multiplier (GRM)

Price divided by gross annual rent. A quick screening ratio that ignores operating expenses entirely, which means it cannot distinguish a well-run building from a badly-run one at the same rent.

H

House hacking

Buying a property with up to four units, living in one and renting the others, which allows the purchase to use low-down-payment owner-occupied financing unavailable to investors. It is the lowest-capital entry point into rental property in the United States.

I

Interest rate cap

A derivative that limits how high a floating loan's index can go, usually required by bridge lenders. A cap struck above the deal's break-even coupon offers little real protection, and replacing one at extension can cost several times the original premium.

Internal rate of return (IRR)

The discount rate at which a series of cash flows has a net present value of zero. It accounts for the timing of money, but implicitly assumes interim distributions are reinvested at the same rate — which is rarely true and is why a headline IRR usually flatters a deal.

L

Loan-to-value (LTV): Loan amount divided by appraised value or purchase price. One of the three tests a lender uses to size a loan, alongside DSCR and debt yield; the smallest of the three determines your proceeds.

N

Net operating income (NOI)

Gross rental income less vacancy and all operating expenses, before debt service, depreciation and capital expenditure. Because commercial valuation is NOI divided by a cap rate, every dollar of NOI created is worth many dollars of value — which is also why sellers present it optimistically.

P

Passive activity loss rules

Rules limiting the deduction of losses from activities in which the taxpayer does not materially participate. Rental activity is presumptively passive, which is why REPS and the short-term rental exception matter so much to investors.

Preferred return

A return paid to limited partners before the sponsor participates in profits. It is a priority, not a guarantee: an unpaid preferred return usually accrues rather than being forgiven, and accruing it is a common sign a deal is underperforming.

Pro forma

A projection of a property's future income and expenses. Useful when built from defensible assumptions and misleading when presented by a seller as though it were performance.

R

Real estate investment trust (REIT)

A company owning income-producing real estate that must distribute most of its taxable income to shareholders. Because of large depreciation charges, REIT earnings per share are misleading; funds from operations is the appropriate measure.

S

Seller financing

An arrangement in which the seller carries all or part of the purchase price as a loan rather than being paid in full at closing. Terms often matter more than price, though most sellers today have a mortgage whose due-on-sale clause complicates it.

Series LLC

An entity structure permitted in a minority of states allowing separate protected series within one LLC, each intended to hold assets shielded from the liabilities of the others. Recognition outside the forming state is not uniform.

Source-of-income protection

A state or local rule prohibiting refusal to rent based on lawful income source, including housing vouchers. Adopted in many jurisdictions since 2015, which makes screening criteria copied from older landlording books unsafe to use.

Syndication

A structure in which a sponsor acquires and operates a property using capital raised from passive investors. Pooling money from passive investors is almost always the sale of a security, with the registration and disclosure obligations that follow.

T

Trailing twelve (T-12)

A property's actual income and expenses over the last twelve months. The document to underwrite from, in preference to a seller's pro forma, which describes a property that does not yet exist.

V

Value-add

A strategy of increasing a property's net operating income through renovation, better management or below-market rents, thereby increasing its value at a given cap rate. The arithmetic works in both directions if cap rates expand.

Y

Yield maintenance and defeasance: Prepayment mechanisms on fixed-rate commercial loans that compensate the lender for lost interest if the loan is repaid early. Both can make an early sale prohibitively expensive, which is why the prepayment clause matters as much as the rate.

Put the terms to work

Calculators — the models behind most of the ratios above.
Guides — each covers one decision end to end.
Full directory — every resource, filterable.

Get Actionable Deal-Finding Strategies

Join the other investors getting valuable insights delivered to their inbox

Actionable Insights

Market Analysis

No Spam