Real Estate Investment Glossary
Clear definitions of the most commonly used terms in lending and real estate investing.
Financial Terms
LTV (Loan-to-Value)
The ratio between the loan amount and the property value. A key metric for evaluating loan risk.
If the property is worth $200,000 and the loan is $140,000, the LTV is 70%.
DSCR (Debt Service Coverage Ratio)
A ratio that measures a property's ability to generate enough income to cover debt payments.
If monthly rent is $2,000 and the mortgage payment is $1,500, the DSCR is 1.33.
ARV (After Repair Value)
The estimated value of a property after completing renovations. Used to evaluate fix & flip projects.
A property bought for $150,000 with $50,000 in renovations may have an ARV of $250,000.
IRR (Internal Rate of Return)
The annualized rate of return that equalizes the present value of future cash flows with the initial investment.
A deal generating 10% annual interest with 2 origination points may have an effective IRR of 12%.
ROI (Return on Investment)
The total return on an investment expressed as a percentage of the capital invested.
You invest $100,000 and receive $110,000 at maturity: your ROI is 10%.
Cap Rate (Capitalization Rate)
A rate that measures the annual return of a property based on its net operating income.
A property generating $15,000 annual NOI valued at $200,000 has a cap rate of 7.5%.
Cash-on-Cash Return
Annual return based solely on cash invested (excluding appreciation or amortization).
If you invest $50,000 in equity and receive $5,000 annually in cash flow, your cash-on-cash is 10%.
Yield
The periodic return generated by an investment, usually expressed as an annual percentage.
A loan at 10% annual generates a monthly yield of 0.833%.
Loan Terms
Bridge Loan
A short-term loan (6-12 months) used for quick acquisition or transitioning between permanent financing.
An investor uses a bridge loan at 10% to quickly purchase a property while arranging long-term DSCR financing.
Bullet Loan
A loan where only interest is paid during the term and the full principal is returned at maturity.
A $100,000 bullet loan at 10% for 12 months: you pay $833/month in interest and return the $100,000 at the end.
First Lien / Second Lien
The priority position of a mortgage. The first lien has repayment priority in case of foreclosure.
If a property has a $150,000 first lien and a $30,000 second lien, in foreclosure the first lien gets paid first.
Origination Points
A fee charged by the lender when originating a loan, expressed as a percentage of the amount. Paid by the borrower.
2 points on a $200,000 loan = $4,000 origination fee.
Prepayment Penalty
A penalty charged to the borrower for paying off the loan before the agreed maturity date.
A loan with 3-month prepayment penalty requires the borrower to pay at least 3 months of interest even if they pay off early.
Amortization vs Interest-Only
Amortization: payments include principal + interest. Interest-only: only interest is paid and principal is returned at the end.
A bridge loan is typically interest-only, while a conventional mortgage is amortizing.
Legal & Process Terms
Foreclosure
The legal process by which a lender takes possession of a property when the borrower fails to make payments.
In Florida, foreclosure is judicial and can take 12-18 months. The first-lien lender has repayment priority.
Title Insurance
Insurance that protects against defects in the property title, such as hidden liens or ownership disputes.
Title insurance is paid once at closing and protects the lender throughout the loan's life.
Appraisal
An independent professional valuation of a property's market value, performed by a certified appraiser.
Before approving a loan, an appraisal is ordered to confirm the property is worth what the borrower claims.
Due Diligence
The process of thorough investigation and verification before making an investment decision.
Due diligence includes: appraisal, title search, borrower verification, property inspection, and legal review.
LLC (Limited Liability Company)
A legal structure that separates personal assets from investment assets, protecting the investor from personal liability.
Most foreign investors create a Florida LLC to structure their real estate investments.
FIRPTA (Foreign Investment in Real Property Tax Act)
A law requiring tax withholding on gains from foreign investors selling US properties.
Under FIRPTA, 15% of the sale price is withheld as tax, applied against the final tax obligation.
Escrow
A custodial account managed by a neutral third party where funds are deposited until agreement conditions are met.
The investor's money is deposited in escrow and only released to the borrower when the mortgage is recorded.
Property Terms
Fix & Flip
A strategy of buying a property at a discount, renovating it, and selling it at a higher price in a short timeframe.
Buy a house for $150,000, invest $50,000 in renovation, and sell for $250,000 = $50,000 gross profit.
Buy & Hold
A strategy of purchasing a property to hold long-term, generating income through rent and appreciation.
Buy an apartment and rent it for $2,000/month while the property appreciates over time.
Rehab (Renovation)
The process of renovating or repairing a property to increase its value, typically in fix & flip projects.
A rehab may include: new roof, kitchen, bathrooms, flooring, painting, and landscaping.
Draw (Construction Disbursement)
A partial release of funds from a construction loan as project stages are completed.
A $500,000 construction loan may have 5 draws: foundation (20%), framing (20%), systems (20%), finishes (20%), completion (20%).
Carry Costs / Holding Costs
Costs of maintaining a property during a project: loan interest, taxes, insurance, utilities.
Carry costs for a 6-month flip may include: $5,000/month interest + $300/month insurance + $200/month taxes.