Real estate is full of jargon, and it can add la lot of confusion to an already convoluted process. Knowing the language of property managers and the real estate industry can make it easier to understand everything going on. We have compiled an ever-growing list of property management terms you should know to help you better understand the process and plan your move.
Following is a list of words and terms that are commonly used throughout this website and in the field of property management.
Appraisal
An appraisal is required to gather the estimated value of a piece of real estate. During the home sale, the mortgage lender sends out an appraiser to get a professional opinion of the value of the property. This helps the lender decide if the property is worth the amount of the loan the potential buyer is seeking.
Appreciation
Appreciation refers to the increase in the value of a property over time. Appreciation can be caused by several things including inflation, the increase in demand or a decrease in supply of properties. Appreciation can also consider added value as a result of property improvements (such as upgrading a kitchen, adding a room or a pool, etc.). Appreciation is usually projected as a percentage of the property’s value over the course of a year.
Affordable Housing
Low-cost residential properties, including for-sale and rental housing. The federal government defines housing units as affordable if they cost a homeowner or renter less than 30% of their median household income.
There are three primary types of affordable housing: subsidized, income-restricted and vouchers:
- Subsidized–Homeowners/renters pay a pre-set percentage of their income each month for this type of housing.
- Income-Restricted–Usually calculated by the Area Median Income, homeowner/renters pay a set amount each month, regardless of their income change.
- Vouchers–Administered and managed by the Department of Housing and Urban Development (HUD), this is a set amount provided to very low-income households, used to pay rent. Any additional rent will be provided by the renter.
Amenities
Amenity/amenities are features that generally boost a property’s marketability and value. Amenities are found in both residential and commercial properties.
There are two types of amenities:
Public amenities, or community services, are available to everyone in the area surrounding the subject property, including parks, schools, shopping centers, post offices and more.
Property-specific amenities describe the features found within a specific property, including a swimming pool, dishwasher, washer/dryer, central AC, ample greenspace and more.
Capitalization Rate
The capitalization rate, or “cap rate”, is a formula used to determine the value of a real estate investment. The cap rate percentage is found by dividing the net operating income of a real estate asset (expenses minus income) by the current value of the asset. The cap rate is always calculated using the current value of the asset, rather than the purchased value of the asset.
Cash Flow
Cash flow is the flow of money in and out of a business, or in the case of a property, it is rent generated by the monthly rent collected vs. the monthly expenses (taxes, HOA fees, mortgages, etc.). When investing in real estate, most investors look for a positive cash flow from a property.
Cash Flow Property
A cash flow property is an investment property that generates a surplus of money each month after all expenses have been paid. Cash flow properties are highly sought after by investors.
Cash on Cash Return
Refers to the annual cash return of a property divided by the amount of cash invested. When a property is purchased outright (no leverage), this is also referred to as the property’s cap rate.
When a property is purchased using leverage, this number differs from the property’s overall return, as it does not include the equity gained by the principal portion of the mortgage payment.
Co-Signer (House)
A co-signer is an individual who has given their consent to assist or fully pay off a loan for another individual if they stop making payments.
A co-signer is used when a borrower or tenant has no significant credit history (such as college students) or doesn’t meet the income requirements to purchase a home or lease a rental unit.
Duplex
Typically used to describe a residential property that houses two families, this structure consists of two units with a common wall.
A duplex house plan can be arranged in many ways: stacked, side-by-side, or in any other configuration if they are connected. Usually, a rental-home duplex has two separate entrances, one for each family/group renting the space.
Equal Housing Opportunity (FHA)
Also known as the Fair Housing Act, the law makes it illegal to discriminate in the sale, lease or rental of housing, or making housing otherwise unavailable, because of race, color, religion, gender, handicap, familial status, or national origin.
Equity
This is the investment a homeowner has in their home. To calculate equity, take the market value of the home and subtract any mortgages or liens against the property. The amount leftover is the amount of equity you have in the home.
It’s important to build equity as homeowners can leverage this financial asset to obtain loans to help finance items such as home repairs, or to pay off higher interest debt.
Escrow Account
An escrow account for a home buyer refers to a sum of money that is held in trust while two or more parties complete a home-sale. The term “in-escrow” would mean that cash is being held by a neutral third party to provide more comfort to both the home buyer and seller while terms and agreements are being finalized. During this process, the third party will maintain all documents and money until the deal is finalized and complete.
Eviction
An eviction is the removal of a tenant from a rental property. It can only take place if there is a legally defined “just cause.” Eviction laws vary by state, but can include violation of lease agreements, rental-payment failures and/or the commitment of an illegal act, such as operating a marijuana- growing facility in a home. After an eviction notice is served, also known as “Notice to Quit”, the resident has a set number of days to vacate the rental property.
FHA loans
FHA loans are part of a group of loans that are insured by the federal government. This means that instead of lending money, the FHA ensures banks and private lenders that they will cover losses they might incur if the borrower does not repay the loan in full or timely.
Homeowner’s association (HOA)
A homeowner’s association is a private association that manages a planned community or condominium. When you purchase a property that is managed by an HOA, you agree to abide by the HOA’s rules and pay its monthly or annually HOA dues. If you fail to pay and/or comply, they often can file a lien against the property and/or foreclose on the property.
Inspection
An inspection happens when buyers pay a licensed professional inspector to visit the home and prepare a report on its condition and any needed repairs. The inspection often happens as part of the due diligence period, so buyers can fully assess if they want to buy a particular home as is or ask the seller to either complete or pay for certain repairs.
Inspection contingency
Also known as a “due diligence contingency,” the inspection contingency is a clause sometimes offered in a purchase agreement that grants buyers a predetermined amount of time during escrow to perform any necessary inspections.
Internal Rate of Return (IRR)
The IRR of an investment is the point at which the net value of investment expenses equals the net value of asset income. These are both calculated at the current value of the investment and not the purchased or future value of the property.
The internal rate indicates at what point an investment could be considered profitable. If an IRR is above a pre-defined number, it is an acceptable investment. It also establishes the growth potential of an investment.
IRA Investing
Refers to using your IRA or retirement account to invest in property. Returns on property purchased with an IRA are generally tax-deferred. However, returns must go back into the IRA account, and cannot be spent prior to retirement.
IRA investing allows people to transfer funds to a self-directed IRA to purchase real estate. It also is possible to obtain a mortgage using the funds in an IRA account, so any type of investment property that you might ordinarily purchase with cash, or a mortgage can also be purchased using an IRA.
Lease
This document is a legally binding contract between two parties (a lessor and a lessee) that outlines the terms of renting property. The lessor is the landlord, and the lessee is the tenant.
If either party fails to uphold the terms of the contract, there will be negative consequences. A lease lays out the terms and conditions that apply to that rental property, including length of lease, length of terms, rental payment frequency, late payment charges, security deposit information and more.
Leasing Fee
A leasing fee is paid to the property manager when they sign a lease with a new tenant. If a tenant renews their lease, there is a re-leasing fee.
Leasing Option
This is also known as “Lease with the Option to Purchase,” and refers to a contract between a landlord and their tenant agreeing that at the end of the lease, the tenant has the option to purchase the property. At the end of the rental period, a lease option gives the renter the opportunity to purchase the property, they must either exercise or forfeit the option upon term expiration.
Lease Renewal
Identified as a contract that offers the option to renew a rental contract at the end of a lease period. The landlord and tenant arrive upon this decision, which typically includes the creation of a new rental contract that will be signed by both parties.
This lease-renewal option is only available if the same tenant decides to remain in the unit; a lease renewal is not available when the tenant switches tenants or brings new tenants to the property.
Leverage Return
A leveraged return is the return calculated on an investment that takes advantage of a mortgage. It is calculated by subtracting the expenses incurred by the property including the interest payment on the mortgage from the income produced by the property and dividing that by the initial investment amount.
Calculation: Income – expenses (including interest payment) / initial investment amount
This differs from the cash-on-cash return because it includes the principal pay down as part of the return.
Loan contingency
A loan contingency is a clause or addendum (also known as a mortgage contingency) in an offer contract that allows a buyer to back out of a deal and keep their deposit if they are unable to secure a mortgage with specified terms during a fixed period.
Multiple listing service (or MLS)
An MLS is a database that allows real estate agent and broker members to access and add information about properties for sale in an area. When a home is listed for sale, it gets logged into the local MLS by a listing agent.
Maintenance Request
Usually, a tenant identifies an issue then requests/ proposes a landlord or property manager to service, repair, check or replace necessary items in a rental home. There are four different types of maintenance:
- Corrective: Focuses on repairing or restoring any broken or failed equipment.
- Preventive maintenance: This is a routine type of maintenance that consists in scheduled inspections that keep equipment and the property in good working order.
- Risk-based: This is another type of maintenance that prioritizes all the maintenance resources toward assets that have a greater risk and consequence of failure.
- Condition-based: This type of maintenance is a strategy that is developed to monitor the actual condition of an asset in order to decide what maintenance should be performed. Condition-based maintenance follows the strategy of only acting when certain indicators show signs of decreasing performance or upcoming failure.
Market Rate
It is defined as the price a buyer pays for a property. Market rates are decided based on the seller’s expectation of price and the buyer’s propensity to pay. It is a price range arrived at by demand and supply looking at actual transaction rates in a place.
Property Manager
A property manager is an individual or company hired by a property owner to oversee the day-to-day operations of a residential or commercial property. Property owners and real estate investors typically hire property managers when they are unwilling or unable to manage the properties efficiently themselves.
Property management companies are responsible for operating the property efficiently, dealing with renters’ requests and issues, conducting showings of vacant rental units, collecting rent, and other important tasks.
Property Maintenance
Refers to the preservation of the top-notch condition of a real estate asset. There are Property Management Services that help maintain the condition of your property professionally though property maintenance. This type of service should be considered an integral part of the overall protection and upkeep of a real estate asset.
Property Inspection
This is a non-invasive, visual inspection of a rental unit, carried out by a fully qualified professional trained and experienced in evaluating real estate. A rental property inspection is designed to provide a property owner and/or the resident with all the information needed to move-in or move-out of the property. In some states, the landlord must give a notice to the tenants before entering, check local laws and regulations in each city/state before entering the property.
A rental property inspection may include, but is not limited to, looking for any damage more than normal wear and tear, illegal alterations to the property or any other changes to the unit that were not previously agreed upon by the landlord. Some changes a landlord may discover during a property inspection might be painting the walls, removal or addition of light fixtures, closet doors or cabinets missing, and so on.
1% Rule
The one percent rule refers to the rent to expense ratio an investment property must have in order to be profitable. While there are several expenses to keep in mind, the rent on an investment property must be at least 1% of the purchase price to have a positive ROI and be considered a favorable investment asset
Real Estate Agent
This is an individual who is licensed to arrange real estate transactions, including selling homes. A real estate agent is responsible for bringing buyers and sellers together and acting as a representative in negotiations.
A real estate agent typically receives compensation completely by a commission—a percentage of the property’s purchase price, so their income depends on their ability to get a deal closed. In almost every state, a real estate agent must work for or be affiliated with a real estate broker (an individual or a brokerage firm), who is more experienced and licensed to a higher degree.
Real Estate Owned (REO)
Real Estate Owned or REO property is one owned by a lender, usually a bank. Lenders generally only take title of properties after an unsuccessful selling attempt at a foreclosure auction. Lenders often attempt to remove any liens or extraneous expenses before trying to sell the property. REO properties can often be purchased below market value making them a great interest to investors.
Realtor
A licensed real estate professional, a realtor is a member of the National Association of realtors (NAR), an advocacy and lobbyist group that supports the interests of real estate professionals. NAR defines the term realtor as a “federally registered collective membership mark that identifies a real estate professional who is a member of the association and subscribes to its code of ethics.”
Remote Investing
Remote investing empowers investors to own property that is geographically removed from their own primary residence. Remote investors purchase property in areas that have favorable returns. Remote investing allows investors to take advantage of lower property costs or higher rents that may not be available near their primary residence.
Rent-back
Rent-back, or leaseback, refers to an arrangement whereby the buyer, who is now the new homeowner, agrees to allow the seller, the now-tenant, to stay in the house beyond the close of escrow. The terms are negotiated prior to the situation occurring and will often involve a lease deposit, a daily rental rate, and a length of time allowable.
The rate can sometimes be determined by looking at the new homeowner’s monthly out-of-pocket for the mortgage as well as the possible inconvenience this may cause them in delaying their own move, all factoring into a daily rate.
Repair
Specific fix to a rental property that brings the unit back to a good, habitable condition. This is the cost incurred to bring an asset back to an earlier condition or work done to keep the asset operating at its present condition. A repair to the home is different from an improvement. This means when implementing a repair, the owner/landlord is maintaining the current rental property state of condition.
Retail Investors
Also known as individual investors or small investors are investors that buy and sell investment assets for their personal account. Retail investors are defined in opposition to institutional investors. Retail investors generally invest at significantly lower amounts than institutional investors.
Return on Investment (ROI)
This metric is used to measure the performance of investment properties. In terms of real estate, ROI directly measures the profit a real estate investor will get in comparison to the cash investment he/she made.
If you are a real estate investor who has bought and owns an income property fully in cash, the ROI calculations should be based on the cap rate formula that includes the Net Operating Income and the Purchase Price:
- Cap rate: In real estate is a ROI analysis metric that calculates return on investment in terms of how much income is being made in comparison to the price of the investment property.
- Net operating income is the annual rental income minus annual operating expenses (excluding mortgage payments and interest rates).
- Purchase Price: Refers to the total selling price of a property which includes the down payment and the principal on the loan.
If you are a real estate investor who has taken out a mortgage loan to finance your investment properties, you should be calculating ROI using the cash-on-cash return formula. This ROI analysis metric gives investors a more accurate projection of their return as it considers financing costs. This formula includes the Annual Return and the Total Cash Invested:
- Annual Return: Is basically the profit you get after subtracting financing costs (like mortgage payments, mortgage interest rates, etc.).
- Total Cash Invested: Is all the cash that you have to pay in order to make your rental property operational. This means: the amount of money to pay to purchase it, closing costs, rehab costs, and loan fees.
Security Deposit
A tenant who wants to occupy a rental unit provides the property owner with a down payment to provide proof of their intent to move in and care for the rental home. When a security deposit is paid, it can be either refundable or nonrefundable, depending on the terms of the lease.
A security deposit may be used to pay for damages to the property while the tenant occupies the property, or to cover lost and/or damaged property. In rental property agreements, a security deposit is used to protect the property owner in a situation whereby a tenant damages the property, violates the lease or the property needs to be cleaned and/or fixed.
Single Family Rentals (SFRs)
A single family rental, or SFR is a free-standing residential property designed to house one family that was purchased by an investor and rented to a tenant. SFRs are defined in opposition to a multi-family property, though properties up to a fourplex are sometimes classified as SFRs as well. Properties with more than four units are defined as multi-family properties. Single family properties generally appeal to families, so from an investment perspective, can be seen as more stable.
Subletting
This is a short-term housing arrangement between the current tenant (sublessor) and a temporary occupant, also known as the subtenant. Subletting is usually done without the landlord’s direct involvement.
When subletting, the current tenant and potential subletter agree on a period and term of occupancy. However, the landlord must agree that subletting is allowed in the unit. Check with your landlord or property management company before subletting your space. In subletting, the sublessor rent’s part or all the home to the subtenant and collects rent from them as part of their lease agreement.
A subletter and current tenant should always consider local laws before executing a sublet agreement. Laws regarding sublease vary from one property to another and from one state to another.
Subject to inspection
Subject to inspection, or “submit offers subject to inspection”, means that the seller is not allowing the property to be viewed without an accepted offer. Some common reasons for this are privacy concerns of the occupants or uncooperative tenants.
The thought of buying a property sight unseen can be daunting for the traditional buyer, which can be used to your advantage as this will inevitably drive overall interest down.
It’s also not as bad as it seems as, under the standard purchase contract, you will have an inspection period, during which you can cancel the sale with no penalty.
Tenant Screening
Tenant screening is the process of looking into a prospective resident’s background (credit scores, employment history, criminal history, rental history etc) before approving of an application or signing of a lease. This screening can include any of the processes listed above (and more) if needed and will give useful information on the applicant to decide.
This is a way to determine if potential tenants will be able to fulfill contract agreements and will be able to see if their ability will meet the requirements of their lease.
Turn Key Property (TKP)
A turnkey property, or TKP is a property that has been purchased, rehabbed and rented to a tenant and is now for sale to another investor. Turnkey properties usually cash flow from the moment the investor purchases it since the property is already rented.
Utilities
Utilities are basic services a property needs, such as electricity, gas, or water. Utilities are often provided and regulated by the government. In rental properties, utilities are usually paid for and covered by the residents (unless stated otherwise in the lease) renting the home. Landlords should specify who is responsible for utilities—the landlord or the tenant—before signing a lease.
Vacant Property
This describes a rental unit that is unoccupied. When a property is vacant, the unit does not produce any cash flow, resulting in loss of money to the property owner for every month that the property is unoccupied.
Vacancy Provision
The money that investors set aside to prepare for future vacancy is called a vacancy provision. It is a percentage of the monthly rent. The average vacancy provision is 6% for vacancy and 6% for maintenance.
Vacancy Rate
There are three different types of a vacancy rate.
- physical vacancy, refers to the amount of time a rental property remains vacant, un-rented, over a 1-year period and considers the total number of vacant units at a given time.
- The economic vacancy rate describes a number that compares the amount of lost rent during a vacant time to the total amount of potential rent collected at the property (had the unit not been vacant).
- The market vacancy rate looks at different property types and assigns an average number to each type.
The physical vacancy rate is calculated by taking the number of vacant units, multiplying that number by 100, and dividing that result by the total number of units (if dealing with multifamily properties). The physical vacancy rate and occupancy rate should add up to 100%. With this formula, one can now evaluate high and low vacancy rates for example high vacancy rates may indicate that a property is not renting well while low vacancy rates may point to strong rental sales.
Walk-through inspection
A walk through inspection in the rental industry can address 2 different situations depending on the time they are performed:
- When the tenant has decided to leave the property. This Walk-through inspection or a ‘move out inspection’ is the same, which is an evaluation done by the landlord or property management company, either with or without the tenant, before the tenant’s moving out of the rental unit.
This is normally done to make sure that no damage to the property is more than normal wear and tear was made during the lease or rental period. The landlord or property manager will look for any damage and assess an overall comparison of the condition of the unit before this tenant moved in.
- Before the leasing / rental papers are signed. Prospective tenants complete a final walk-through to make sure any agreement to make repairs or do other things about the property have been fulfilled before the leasing / rental papers are signed.
A walk-through inspection allows the renter to ask the landlord or property management company to fix the problem If something isn’t right before the lease is signed.
To learn more about any of these terms or about anything property management and real estate investing related we might have left out, please reach out to one of our highly educated Real Property Management Southern Ct. team members! We look forward to educating you.
We are pledged to the letter and spirit of U.S. policy for the achievement of equal housing opportunity throughout the Nation. See Equal Housing Opportunity Statement for more information.
