The Accelerated Cost Recovery System (ACRS) is a method of depreciation that spreads the deduction of a property’s cost over specific periods. Originating from the Economic Recovery Tax Act of 1981 and later modified, ACRS was devised to provide significant tax incentives.
An accredited investor is an individual or entity that meets specific financial criteria set by regulations, allowing them to invest in certain types of high-risk or complex investments that are usually not accessible to the general public.
Acquisition refers to the process of obtaining ownership of an asset through various means such as purchase, trade, or gift. It also encompasses the asset that has been acquired.
The acquisition cost of a property is the total price and all associated fees required to complete the transaction and take ownership of the property.
The adjusted tax basis refers to the original cost or other basis of property, reduced by depreciation deductions and increased by capital expenditures.
An advance in real estate is a form of loan disbursement given to real estate developers or builders. This is sometimes referred to as a 'draw,' where funds are released based on the completion of certain stages within a real estate project.
After-tax cash flow refers to the net cash flow generated by an income-producing property after accounting for income taxes and tax savings from allowable deductions. This measurement provides a true picture of an investor's profitability from real estate holding.
The rate of return on an equity interest in real estate, taking into account financing costs and income tax implications of the investor.
The Age-Life Method of Depreciation is a technique that estimates all forms of depreciation sustained by an asset, based on the effective age of the property or component, divided by the total economic life of the property or component.
An annuity factor is a mathematical figure that shows the present value of an income stream that generates one dollar of income each period for a specified number of periods.
Real estate appreciation refers to the increase in the value of a property over time. It can be influenced by a variety of factors including market demand, location, inflation, and property improvements. Appreciated value can enhance investment returns for property owners.
Tax laws that limit the amount of deductible tax losses an investor can claim based on their tangible financial risk in an investment. These rules were specifically extended to real estate investments by the 1986 Tax Reform Act.
An income property appraisal technique where the overall rate of earnings is derived from weighting mortgage and equity rates. It provides insights into the true capital structure of a real estate investment and determines the overall rate of return required by investors.
Basic Rate, often used in the context of capitalization rates, represents the foundational return rate required by investors for a particular investment, before additional considerations are factored in.
Before-tax cash flow refers to the amount of cash that a property generates before income taxes are deducted. This figure is critical for evaluating the performance of real estate investments and comparing different investment properties.
The funds returned to the equity investor after the sale of a property, exclusive of income taxes.
A blighted area refers to a section of a city primarily characterized by deteriorating, dilapidated, or unsafe structures. It often necessitates significant urban renewal and rehabilitation to revitalize and redevelop the area.
Boot, in a real estate context, refers to any non-like-kind property that is included in a property exchange to balance the value. It can comprise cash, personal property, or other liabilities.
An itemized list of expected income and expenses prepared weekly, monthly, or annually. A budget is crucial in managing finances efficiently and planning for future needs in real estate investments.
A Building Capitalization Rate (Cap Rate) is a metric used in real estate to convert an income stream from a property into a lump sum value. It is a crucial tool for appraisers and investors to estimate the value of a property.
The buildup rate is a method to develop a capitalization rate by adding the individual components contributing to the risk and return of an investment. It offers a systematic approach to evaluate the total return expected for real estate investments.
A bulk sale involves the sale of multiple real estate assets together, often including a mix of high-performing and underperforming properties. This strategy can accelerate property disposal and manage complex portfolios effectively.
A Burned-Out Tax Shelter refers to a real estate investment that was once advantageous for providing large income tax deductions but has lost its tax-sheltering benefits over time due to the reduction and eventual nil in depreciation deductions and the decrease in interest deductions as mortgage payments increasingly cover the principal.
Capital Expenditure, commonly referred to as CAPEX, are funds used by a company to acquire, upgrade, and maintain physical assets such as property, industrial buildings, or equipment.
Capital Expenditure (CapEx) refers to the funds used by an organization to acquire, upgrade, and maintain physical assets such as property, industrial buildings, or equipment. These expenditures are critical for the long-term growth and operational efficiency of an organization and are generally depreciated over their useful life.
A capital gain is the profit that results from a sale of a capital asset, such as real estate, stocks, or bonds, where the sale price exceeds the purchase price.
Capital improvements, also referred to as capital expenditures, are significant upgrades, enhancements, or additions to an existing property that increase its overall value, extend its useful life, or adapt it to new uses.
Capital Recovery refers to the process by which an investor recoups the initial investment in a real estate or business venture. This is typically achieved through revenue generation, cash flows, or sale of the asset. Understanding capital recovery is crucial for assessing the viability and profitability of investments.
Capital structure refers to the composition of capital invested in a property, reflecting the interests of those who contributed both debt and equity capital.
A capitalization rate (Cap Rate) represents the rate of return expected to be generated on a real estate investment property. It helps in deriving the property's current market value or the potential return on investment.
Carrying charges refer to the ongoing expenses necessary for holding a property, such as taxes, interest on loans, insurance, and maintenance costs. These charges are pertinent to both idle properties and properties under construction.
The Case-Shiller/S&P Home Price Index is a measure developed by economists Carl Case and Robert Shiller for Standard & Poor's Corporation. It tracks the price changes of single-family homes in the U.S. by analyzing repeat sales of properties across various metropolitan areas.
Cash flow refers to the periodic amounts available to an equity investor after deducting all periodic cash payments from rental income, providing insight into the liquidity and operational viability of a real estate investment.
Cash Flow Analysis assesses the inflows and outflows of cash in a business or investment over a specific period, aiding in financial strategy and decision-making.
A cash purchase in real estate refers to acquiring property without the use of financing or loans, where the buyer pays the full purchase price in cash.
Cash throw-off, often referred to as cash flow, is a crucial metric in real estate investment that indicates the amount of cash generated by a property after all operating expenses and debt service have been paid. It is a measure of the income-producing ability of a property.
Cash-on-cash return (CoC return) is a rate of return commonly used in real estate transactions that calculates the cash income earned on the cash invested in a property.
Class of property is a subjective division of buildings based on desirability among tenants and investors, considering factors like age, location, quality, and maintenance.
A CMO REIT is a type of Real Estate Investment Trust (REIT) that primarily invests in Collateralized Mortgage Obligations (CMOs), deriving its cash flow from interest and principal receipts on these securities.
CMO, or Collateralized Mortgage Obligation, is a type of mortgage-backed security that pools together a large number of mortgages and issues several classes or tranches with varying degrees of risk and returns.
A collateralized mortgage obligation (CMO) is a type of security backed by a pool of mortgage loans that are structured into different classes, each with distinct maturities. CMOs, often using Real Estate Mortgage Investment Conduits (REMICs) as a standard investment vehicle, provide investors with specified periodic interest and principal payments.
Commercial property refers to buildings or land intended to generate a profit, either from capital gain or rental income. This category includes a diverse array of properties such as shopping centers, office buildings, hotels, resorts, and restaurants.
A community shopping center, also known as a community center, is a retail property designed to serve a larger area than a neighborhood center, providing a wider array of goods and services.
The Comparative Sales Approach, also known as the Sales Comparison Approach, is a real estate appraisal method that estimates the value of a property by comparing it to similar properties that have recently sold in the same area.
Condo fees, also known as maintenance fees, are regular payments made by condominium residents to cover the upkeep and maintenance of common areas and facilities within the condominium complex.
A condotel is a type of property that combines elements of both condominiums and hotels. Individual units within the property are sold to individual owners who can use the property when they choose and participate in a rental program when they are not using it.
Cost basis refers to the original value of a property for tax purposes, adjusted over time for improvements, deprecation, and other related factors. This concept is fundamental in real estate transactions for determining capital gains or losses upon the sale of the property.
Counseling in real estate entails advising clients on a wide range of investment or development matters. This can include selecting properties, structuring investments legally, and maximizing after-tax returns among other aspects.
The Counselors of Real Estate (CRE) is a professional organization of real estate investment counselors and consultants. Affiliated with the National Association of REALTORS®, it awards the designation of Counselor of Real Estate and publishes the journal 'Real Estate Issues.'
Debt capital refers to money loaned on a long-term basis that is used to finance an investment, including real estate. Unlike equity capital, debt capital must be repaid to the lenders with interest.
A Deferred Exchange, often termed as a Delayed or Tax-Free Exchange, refers to a real estate transaction facilitated under Section 1031 of the Internal Revenue Code, allowing the deferral of capital gains taxes on the sale of an investment property, provided another like-kind property is acquired within a specific timeframe.
Deficit Rent refers to the difference between the market rent and the contractual rent for a specific property. It can indicate potential income loss for property owners when actual collected rent is less than the prevailing market rates.
Depreciable life is the time period over which the cost of an asset can be spread for tax or appraisal purposes, reflecting either the recovery of investment or the estimated useful economic life of an asset.
Depreciation (Tax) refers to an annual tax deduction for wear and tear and loss of utility of property. It allows property owners to account for the decrease in value of their real estate assets over time.
Depreciation recapture refers to the process of collecting income tax on gains made through the sale of depreciable property, where deductions for accelerated depreciation exceed via recapture in accordance with Section 1250 of the Internal Revenue Code.
A developer is an individual or company that improves raw land into improved property by utilizing labor, capital, and entrepreneurial efforts.
Developer profit is the anticipated increase in value created by a real estate developer. This profit represents the difference between the final market value of the developed real estate project and the aggregated costs of materials, labor, and overhead.
Development refers to the process of adding improvements to a parcel of land, which can include drainage, utilities, subdividing, access, and buildings. It encompasses all activities from the preparation of detailed plans to securing government permits and the actual construction.
Direct capitalization is a valuation method used in real estate to estimate the value of an income-producing property by dividing the net operating income (NOI) by the capitalization rate (cap rate).
Directional growth refers to the location or direction toward which a city or urban area is expanding. Understanding directional growth is crucial for real estate investors, developers, city planners, and policymakers to make informed decisions about property investments, infrastructure development, and urban planning.
The discount rate serves as a critical financial mechanism for converting future income streams into present-day values, ensuring the appropriate valuation and feasibility of real estate investments.
Discounted Cash Flow (DCF) is a valuation method used to estimate the value of an investment based on its expected future cash flows. This technique incorporates the time value of money by discounting the future cash flows to present value.
Discounted Cash Flow (DCF) is a financial valuation method used to determine the value of an investment based on its expected future cash flows, which are discounted to reflect their present value. This technique takes into account the time value of money.
Real estate that is under foreclosure or impending foreclosure due to insufficient income production, leading to negative cash flow or default on mortgage payments.
A DOWNREIT is an arrangement between the owner of real property and a Real Estate Investment Trust (REIT) aimed at providing tax advantages to the property owner. The result is effectively a partnership with ownership units held by those who contribute properties to the venture. The DOWNREIT owns real estate either outright or as part of a limited partnership.
A provision in a mortgage that pledges multiple properties as collateral, potentially including newly acquired properties owned by the borrower. A default on one mortgage constitutes a default on the one with the dragnet.
A duplex is a type of multi-family home that features two distinct living units within one building and a single structure.
Economic life refers to the remaining period for which real estate improvements are expected to generate more rental income than their operating expenses.
Economic Occupancy refers to the effective occupancy rate of property units based on units rented for money, rather than the physical occupancy, which simply counts the number of occupied units regardless of whether rent is being paid.
A technique used in the appraisal of mortgaged income property to estimate its present value by discounting the future annual cash flow and expected resale proceeds.
An end user in real estate refers to the individual or entity that ultimately uses or occupies a property, though they may not necessarily be the one who purchases, produces, or pays for it.
Environmental Obsolescence refers to a form of depreciation in property value due to external, environmental factors that negatively impact its desirability and usability.
Equity buildup refers to the gradual increase in a homeowner's equity or ownership stake in a property as debt principal is paid down through scheduled mortgage payments.
Equity Dividend represents the portion of annual cash flow that an investor receives from their investment in real estate, calculated before taxes.
Equity represents the interest or value that an owner has in real estate over and above the liens or debts against it. It is calculated by subtracting the total liens from the market value of the property.
Equity participation entails property owners selling an interest in their property to an investor, who, in return, provides capital or financial support. It enables property owners to unlock capital without relinquishing full control.
Equity takeout refers to the process of refinancing a property mortgage primarily to raise cash. This results in an increase in the debt secured by the property while leveraging the equity built into the home.
The equity yield rate is the rate of return on the equity portion of an investment, taking into account periodic cash flow and the proceeds from resale. It considers the timing and amounts of cash flow after annual debt service, but not income taxes.
An Escalator Mortgage, commonly referred to as an Adjustable-Rate Mortgage (ARM), is a type of home loan where the interest rate fluctuates based on a specific financial index, causing periodic payment adjustments over the life of the loan.
Excess rent refers to the amount by which the rent specified in an existing lease exceeds the rental rate currently demanded in the market for similar properties. It carries implications for property valuation and investor decision-making.
Financial feasibility assesses whether a proposed land use or change in land use can economically justify itself. This evaluation is a crucial aspect of determining the highest and best use of the land but does not alone determine the optimal land use.
Financial leverage refers to the use of borrowed funds to increase an investment's potential return. While it can amplify returns, it simultaneously increases the risk of loss.
Financial transparency in real estate involves the full disclosure and public reporting of financial activities, allowing outsiders to accurately estimate risk and forecast income from investments.
A Finished Lot refers to a parcel of land that has been prepared for immediate construction with essential infrastructure, legal clearances, and utilities in place.
First-Year Depreciation allows property owners to take a larger depreciation deduction in the first year than what is typically provided under regular depreciation schedules, thereby accelerating tax benefits.
A Fixed-Price Lease-Purchase Option is a contractual agreement where a tenant has the option to purchase the leased property at a predetermined price after or during the lease term.
A fixer-upper refers to a property that requires repairs, renovations, or updates, often purchased at a lower price with the intention of improving it for resale or personal use.
FLIP involves the purchase and immediate resale of property, often within hours or days, aiming for quick profit. It can carry a negative connotation when associated with illegal activities that exploit innocent parties.
A Four-Plex is a type of residential building configuration that contains four separate dwelling units. It offers opportunities for both living in one unit and renting out the others or renting all four units for income.
A fractured condominium refers to a housing development in which some units are rented out as apartments while others are sold and occupied as owner-occupied condominiums. This situation typically arises when a developer's attempt to sell a majority of units as condos fails, resulting in a mixed-use scenario.
Functional Depreciation, also known as Functional Obsolescence, refers to the loss of property value due to its outdated or inefficient design, which adversely affects its utility, desirability, or functionality.
A General Partner is a member of a partnership whose liability is not limited. In any standard partnership, all partners are general partners by default, whereas a limited partnership must have at least one general partner.
A Ginnie Mae Pass Through is a pass-through certificate secured by a pool of mortgage loans insured by the Government National Mortgage Association (Ginnie Mae), an arm of the federal government. These securities often provide high yields with security to investors, though returns may be affected by the pattern of loan repayments on the mortgages in the pool.
The Going-In Cap Rate, also known as the entry cap rate, is the ratio of the initial year's Net Operating Income (NOI) to the acquisition price of an investment property. This key metric helps investors assess the initial yield they can expect from a real estate investment.
Gross income represents the total income generated from property or other sources before any expenses or deductions are applied. It includes rental income, alimony, retirement benefits, and various other income streams.
The Gross Income Multiplier (GIM) is a valuation metric used in real estate to evaluate the value of a property by comparing its gross income to its purchase price. It is a useful tool in determining the profitability and potential return on investment of income-producing properties.
The Gross Income Multiplier is a tool used in real estate valuation to compare properties by evaluating the price of a property relative to its gross rental income.
The Gross Rent Multiplier (GRM) is a simplified ratio used by real estate investors to evaluate the potential profitability of an income-generating property. It is calculated by dividing the property's purchase price by its gross annual rental income.
Gross Rent Multiplier (GRM) is a real estate metric used to evaluate and compare rental income properties. It is calculated by dividing the property’s sales price by its gross annual rental income.
The Gross Rent Multiplier (GRM) is a metric used by real estate investors to evaluate the potential profitability of an investment property based on its rental income.
