Real Estate Investing Terms, Explained

Investment property terms and formulas - cap rate, NOI, cash flow, DSCR, IRR, BRRRR, 1031 exchanges and more.

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Cap Rate
Cap rate (capitalization rate) is a rental property's net operating income divided by its price or value, shown as a percentage. It is used when comparing income properties or estimating value, and matters because it shows the yield before financing on the same basis for every property.
Net Operating Income
Net operating income (NOI) is a property's yearly income from rent and other sources minus its operating expenses, before mortgage payments, depreciation and income taxes. It is used when valuing and financing rental property, and matters because cap rate, DSCR and loan size are all calculated from it.
Cash Flow
Cash flow is the money left over from a rental property's income after paying all operating expenses and debt service — positive cash flow means the property generates more than it costs to run and finance.
Cash-on-Cash Return
Cash-on-cash return is a rental property's annual pre-tax cash flow divided by the total cash invested, such as the down payment, closing costs and initial repairs. It is used when comparing financed investments, and matters because it shows what the investor's own money earns after mortgage payments.
DSCR
DSCR (debt service coverage ratio) is a property's net operating income divided by its annual loan payments. It is used when lenders size or approve rental and commercial loans, including DSCR loans that qualify on property income, and matters because a ratio below 1.0 means the income does not cover the mortgage.
BRRRR
BRRRR (buy, rehab, rent, refinance, repeat) is a rental investing strategy: buy a property that needs work, renovate it, rent it out, then refinance at the higher value to recover cash for the next purchase. It matters because it can recycle capital, but only if the appraisal and the rent support the new loan.

Step by step

All 64 terms

  • 1% RuleIntermediate

    The 1% rule is a quick rental-investing screening test: a property's monthly rent should be at least 1% of its purchase price for the deal to be worth a closer look.

  • A 1031 exchange lets an investor defer tax on the gain from selling real property held for business or investment by reinvesting in other like-kind real property. In a deferred exchange the replacement must be identified within 45 days and received within 180 days of the sale, or by the tax return due date if earlier.

  • 70% RuleIntermediate

    The 70% rule is a fix-and-flip screening formula: pay no more than 70% of a property's after-repair value (ARV), minus the estimated repair costs. The remaining margin is meant to cover holding costs, selling costs and profit, so it is a conservative starting point rather than a guaranteed return.

  • An accredited investor is an individual who meets SEC-defined income or net worth thresholds, qualifying them to invest in private real estate syndications and other securities not registered for the general public.

  • AFFO refines FFO further by subtracting recurring capital expenditures and leasing costs needed to maintain the properties — intended to approximate the cash actually available to distribute to shareholders, often shown per share as "AFFO per share."

  • After-repair value (ARV) is the estimated market value of a property once planned renovations are finished, based on recent sales of comparable renovated homes. It is used when budgeting a flip, BRRRR or renovation loan, and matters because the purchase price, repair budget and profit are all measured against it.

  • Asset repositioning is the process of renovating, re-tenanting, or re-marketing an underperforming commercial property to raise its rents, occupancy, or market perception — and, with it, its value.

  • An assignment of contract transfers a wholesaler's rights and obligations under a purchase agreement to a new end buyer, in exchange for an assignment fee — the mechanism most wholesale deals use to close.

  • BRRRR (buy, rehab, rent, refinance, repeat) is a rental investing strategy: buy a property that needs work, renovate it, rent it out, then refinance at the higher value to recover cash for the next purchase. It matters because it can recycle capital, but only if the appraisal and the rent support the new loan.

  • Buy and HoldIntermediate

    Buy and hold is a long-term investment strategy where an investor purchases a rental property and holds it for years, earning income from rent and building wealth through appreciation and equity.

  • Cap rate (capitalization rate) is a rental property's net operating income divided by its price or value, shown as a percentage. It is used when comparing income properties or estimating value, and matters because it shows the yield before financing on the same basis for every property.

  • A CapEx reserve is money set aside from rental income to cover eventual big-ticket replacements — roof, HVAC, water heater — that don't happen every year but are certain to happen eventually.

  • Capital StackIntermediate

    The capital stack is the combination of debt and equity used to pay for a property, ranked by who gets paid first. Senior debt sits at the bottom with the first claim and lowest risk, followed by mezzanine debt and preferred equity, with common equity on top - last to be paid and first to absorb losses.

  • Carried interest, or "the promote," is the share of profits a general partner earns for managing a real estate syndication, on top of their own equity investment — typically earned only after limited partners receive their preferred return.

  • Carrying costs are the ongoing expenses of owning and holding a property before it produces income or is resold — property taxes, insurance, loan interest, utilities, and HOA fees.

  • Cash FlowIntermediate

    Cash flow is the money left over from a rental property's income after paying all operating expenses and debt service — positive cash flow means the property generates more than it costs to run and finance.

  • A cash flow waterfall is the agreed order in which a syndication's profits are distributed — typically returning capital and a preferred return to limited partners first, before splitting remaining profit between the GP and LPs.

  • Cash-on-cash return is a rental property's annual pre-tax cash flow divided by the total cash invested, such as the down payment, closing costs and initial repairs. It is used when comparing financed investments, and matters because it shows what the investor's own money earns after mortgage payments.

  • Cost segregation is a tax strategy that breaks a property's cost into components with shorter depreciation lives — like carpeting, fixtures, or parking lots — allowing an investor to front-load depreciation deductions instead of spreading them evenly over 27.5 or 39 years.

  • Debt ServiceIntermediate

    Debt service is the total amount of principal and interest owed on a loan over a given period, most often expressed as an annual figure in real estate investment analysis.

  • Debt YieldAdvanced

    Debt yield is a property's net operating income divided by the loan amount. Commercial lenders use it to limit how much they will lend, because unlike DSCR it does not change with the interest rate or amortization - it shows the return the lender would earn on the NOI if it had to take the property back.

  • Depreciation recapture is a tax owed when a depreciated rental property is sold — the IRS taxes the portion of the gain equal to depreciation previously deducted at a separate rate, since that depreciation reduced taxable income while the property was held.

  • A double closing is a wholesale strategy where the wholesaler briefly takes actual title to a property in one closing, then immediately resells it to the end buyer in a second closing — used instead of an assignment when the fee needs to stay confidential or the contract restricts assignment.

  • DSCR (debt service coverage ratio) is a property's net operating income divided by its annual loan payments. It is used when lenders size or approve rental and commercial loans, including DSCR loans that qualify on property income, and matters because a ratio below 1.0 means the income does not cover the mortgage.

  • A Delaware Statutory Trust is a legal structure that lets multiple investors each own a fractional, passive interest in a larger property, while still qualifying as "like-kind" real estate for a 1031 exchange.

  • Effective gross income (EGI) is the rental income a property is expected to actually collect: gross potential rent, minus vacancy and credit losses, plus other income such as parking or laundry. Operating expenses are subtracted from EGI to arrive at net operating income.

  • Equity multiple measures the total cash an investor receives over the life of an investment relative to the equity they put in, expressed as a multiple such as 1.7x rather than an annual rate. It shows how much money comes back, but not how quickly.

  • The exit cap rate — also called the terminal, reversion, or going-out cap rate — is the capitalization rate used to estimate a property's resale value at the end of a projected holding period, applied to the year-following-sale NOI.

  • FFO is a standard REIT profitability metric that adds depreciation and amortization back to net income and removes gains or losses from property sales — designed to better reflect real estate cash flow than GAAP net income, since real estate depreciation rarely matches actual value decline.

  • Fix and FlipIntermediate

    A fix and flip is a real estate investment strategy where an investor buys a property below market value, renovates it, and resells it for a profit, typically within months.

  • The general partner is the party that sources, acquires, and actively manages a real estate syndication's investment — typically taking on legal liability and earning fees plus a carried-interest profit share for doing so.

  • The going-in cap rate is a property's cap rate at purchase: projected first-year net operating income divided by the purchase price. It is the starting yield an investor buys, and the benchmark later compared with the exit cap rate and with yield on cost.

  • The gross rent multiplier (GRM) is a quick screening ratio that divides a property's price by its gross annual rent, before any expenses. A lower GRM means more rent per dollar of price, but because it ignores vacancy and operating costs, it only ranks listings for a closer look.

  • Gross rental income is a property's total rental income before subtracting vacancy, operating expenses, or debt service — the starting point for calculating NOI.

  • House HackingIntermediate

    House hacking means buying a multi-unit or single-family property, living in part of it, and renting out the rest — using rental income to offset or fully cover the owner's own mortgage payment.

  • IRR is the annualized rate of return an investment is expected to generate over its full holding period, accounting for the timing and size of all cash flows — including the eventual sale.

  • LeverageIntermediate

    Leverage means using borrowed money (a mortgage) to control a larger asset than an investor could afford with cash alone — it can amplify both returns and losses.

  • A limited partner is a passive investor in a real estate syndication who contributes capital but isn't involved in day-to-day management, with liability generally limited to the amount they invested.

  • Loan-to-Cost (LTC)Intermediate

    Loan-to-cost (LTC) is a loan amount divided by the total cost of a project - purchase price plus renovation or construction costs. Construction and fix-and-flip lenders use it to size loans, because the finished value does not exist yet; it is usually checked alongside loan-to-value or loan-to-ARV.

  • MAO is the highest price an investor should pay for a fix-and-flip property to hit their target profit, calculated from the after-repair value, renovation costs, and desired margin.

  • Net operating income (NOI) is a property's yearly income from rent and other sources minus its operating expenses, before mortgage payments, depreciation and income taxes. It is used when valuing and financing rental property, and matters because cap rate, DSCR and loan size are all calculated from it.

  • Operating ExpensesIntermediate

    Operating expenses are the recurring costs of running a rental property - property taxes, insurance, repairs and maintenance, management fees, owner-paid utilities and similar costs. They are subtracted from rental income to calculate net operating income and never include mortgage payments, depreciation or capital improvements.

  • A passive activity loss is a tax loss from rental real estate or other activities an investor doesn't materially participate in — IRS rules generally limit deducting these losses against non-passive income like a salary, unless the investor qualifies as a real estate professional.

  • A preferred return is a minimum annual return — commonly 6-8% — that limited partners in a real estate syndication must receive before the general partner earns any profit share (promote).

  • A property management fee is what a landlord pays a property manager to handle leasing, rent collection, maintenance coordination, and tenant issues, typically 8-12% of monthly collected rent.

  • A Qualified Opportunity Fund is an investment vehicle that channels capital gains into designated Opportunity Zones in exchange for federal capital gains tax deferral and, if held long enough, potential exclusion of gains on the new investment.

  • A real estate capitalization ("cap") table is a schedule showing every investor in a real estate syndication or fund, their ownership percentage, capital contributed, and their position in the deal's profit-distribution waterfall.

  • Real estate professional status is an IRS tax classification for taxpayers who spend more than 750 hours a year and over half their working time materially participating in real estate activities — qualifying them to deduct rental losses against ordinary income without the usual passive-loss limits.

  • A real estate syndication pools capital from multiple passive investors (limited partners), managed by a sponsor (general partner), to acquire a property too large for any single investor to buy alone.

  • A REIT is a company that owns, operates, or finances income-producing real estate and trades on public markets like a stock, letting investors gain real estate exposure without buying property directly.

  • Rent ControlIntermediate

    Rent control refers to local laws limiting how much and how often a landlord can raise rent on existing tenants, and in some jurisdictions restricting eviction reasons.

  • Rental YieldIntermediate

    Rental yield measures a property's annual rental income as a percentage of its value or purchase price — similar to cap rate, but sometimes calculated using gross income rather than NOI.

  • Return of capital is a distribution to investors that represents giving back part of their original invested capital, rather than paying out taxable profit or income.

  • ROI (return on investment) measures the total gain from an investment relative to its cost, expressed as a percentage. In real estate it can include cash flow, loan paydown, appreciation and sale proceeds, so check what a quoted ROI counts and what it divides by before comparing figures.

  • Section 8 is a federal rental assistance program where the government pays a portion of a qualifying tenant's rent directly to a participating landlord.

  • A short-term rental is a property rented out for brief stays — typically under 30 days, as on Airbnb or Vrbo — as opposed to a traditional lease, often generating higher nightly income but with more variable occupancy and higher management effort.

  • Stabilized NOI is the net operating income a property is expected to produce once it reaches normal, sustainable occupancy, rents and expenses. It strips out temporary distortions from lease-up, renovation, a recent acquisition or one-off costs, so the property can be valued on its ongoing earning power.

  • Tenancy in CommonIntermediate

    Tenancy in common lets two or more people own a property together in unequal or equal shares, each free to sell or will their share independently — with no automatic right of survivorship to the other owners.

  • Ticket SizeAdvanced

    Ticket size is the amount of money committed in a single investment: the typical size of one deal a fund or lender takes on, or the amount one investor puts into a syndication. Funds, lenders and sponsors state target ticket sizes so they only review opportunities that fit their capital.

  • Turnkey RentalIntermediate

    A turnkey rental is a fully renovated, already-tenanted (or rent-ready) investment property sold with the intent that a buyer can start collecting rent with minimal additional work — often paired with third-party property management.

  • Vacancy RateIntermediate

    Vacancy rate is the share of time a rental property - or the share of units in a market - sits empty and earns no rent. Investors subtract an expected vacancy allowance from gross rent to estimate realistic income, because even well-run rentals lose some rent between tenants.

  • Wholesaling is a strategy where an investor puts a property under contract at a below-market price, then assigns or sells that contract to an end buyer for a fee — without ever taking ownership of the property themselves.

  • Years' PurchaseIntermediate

    Years' purchase is a valuation multiplier equal to 1 divided by the yield. It is the number of years of today's net income a buyer is paying for: multiply annual net rental income by the years' purchase to get a capital value, so a 5% yield means 20 years' purchase.

  • Yield on cost - also called return on cost - divides a development or value-add project's projected stabilized net operating income by its total project cost, including land or purchase price, construction, soft costs and financing. It shows the income return on everything spent, before any sale.

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Definitions are provided for general educational purposes and are not financial, legal, tax, or real estate advice. Rules vary by transaction and location - verify important decisions with qualified professionals.