Ground rent is the regular payment made by a lessee to the lessor for the lease of land, usually on a long-term lease agreement, allowing the lessee to utilize the land for specified purposes while retaining ownership rights with the lessor.
A Hedge Fund is an unregulated pool of investment money, sometimes invested in real estate. By operating outside of financial regulatory requirements applicable to banks or mutual funds, hedge funds may gain investment opportunities that are superior to regulated entities. Annual fees for hedge fund managers are generous, typically 2% of assets plus 20% of profits.
In real estate, historic cost refers to the original financial expenditures incurred during the construction or acquisition of a property. This term contrasts with the original cost, which represents the purchase price paid by the current owner.
Holding costs, also known as carrying costs, are the expenses incurred by owning and maintaining a property over a period of time until it is sold or put to productive use.
The holding period in real estate refers to the duration of time an investor retains ownership of a property. This interval plays a crucial role in determining the financial outcomes and strategies of the investment, such as potential tax implications, capital appreciation, and cash flow management.
The Home Price Index (HPI) is a measure of the relative level of prices in a specific housing market at a specific time. The index values indicate change over time rather than an average or median price in dollars. They are typically pegged to a starting value and show the appreciation or depreciation in housing prices.
Illiquidity refers to the inability to quickly convert an asset into cash without a significant loss in value. Real estate is considered an illiquid investment because of the time, effort, and costs required to sell properties.
The Improvement Ratio measures the relative value of improvements on a property compared to its unimproved value, providing insight into the investment in enhancements versus the land value itself.
Income Property refers to real estate that is specifically utilized to generate rental income. It encompasses a variety of property types that can provide steady income streams to the owner.
An income stream refers to a regular flow of money generated by a business or investment. It can come from various sources such as rentals, dividends, interest, or any other form of residual income.
Initial equity refers to the amount of down payment made by a buyer when purchasing a property. Initial equity does not include appreciation, mortgage amortization, or transaction costs.
Interest in real estate can refer to both the cost associated with borrowing money to finance real estate transactions and the extent of ownership in a property.
Interest deductions under current tax law vary based on the type of interest incurred. From investment interest to consumer interest, different rules apply for deductibility.
An interest rate is the percentage of a loan amount charged by the lender to the borrower for the use of the borrowed funds. It can also represent the rate of return on an investment. Understanding interest rates is crucial for real estate transactions as they significantly affect mortgage payments and the overall cost of borrowing.
Interest rate risk refers to the potential variability in investment returns due to changes in interest rates. This risk can profoundly impact the market value of real estate investments and mortgage-backed securities.
Investment analysis is the evaluation of the potential returns from real estate investments, helping assess the amount an investor should pay and the investment’s suitability. The analysis encompasses various methods to estimate returns based on multiple assumptions and investment horizons.
The Investment Life Cycle refers to the entire process an investment goes through from its initial acquisition to its final disposal or sale. Understanding this cycle helps stakeholders make informed decisions regarding entry and exit points to maximize returns.
Investment properties are real estate assets purchased with the intention of earning a return on investment. This can be through rental income, the future resale of the property, or both.
Investment value refers to the estimated value of a real estate investment to a specific investor, which can vary from the property's market value based on the investor's unique situation and objectives.
Investment-grade property refers to real estate of such quality and size that it’s eligible for inclusion in high-quality institutional portfolios, typically owned by large investors like insurance companies, pension funds, and real estate investment trusts (REITs).
The Inwood Annuity Factor is a number used to determine the present value of a series of equal periodic payments from a level payment income stream, considering a specific interest rate.
A kick-out clause is a provision in a real estate sales contract that enables the seller to void the agreement if a superior offer is received before the sale closes.
Land banking refers to the practice of acquiring parcels of land with the intention of holding onto them until they become more valuable or are ready to be developed.
A land lease, also known as a ground lease, is a contractual agreement where the tenant leases the land on which they intend to construct a building or other improvements, while the land itself remains the property of the landlord.
A Lease with Option to Purchase is a leasing arrangement where the lessee (tenant) has the right to purchase the leased property at a predetermined price within a specified timeframe, subject to certain conditions.
Leased Fee refers to the landlord's ownership interest in a property that is under lease. It's the structure for defining income from rental property, emphasizing the importance of anticipated rental income for assessing value.
Leased fee value represents the worth of a property to the landlord based on the current rental agreements in place. It's crucial for understanding property valuation under existing lease conditions.
Leasehold value refers to the valuation of a tenant's interest in a property, especially beneficial when the rent is below the current market rates and the lease term is significant. It plays a crucial role in investment decisions where there is a discrepancy between market rent and the agreed lease rent.
Leverage involves the use of borrowed funds to increase an investor's purchasing power and potentially amplify the profitability of an investment. It can result in higher returns but also carries additional risk.
States whose laws give a lien on property to secure debt. This is contrasted with title-theory states where the lender holds the title. In lien-theory states, borrowers have the right to use and enjoy the property unless they default, at which point lenders may foreclose.
Assets considered to be of the same nature and character, even if they differ in quality or grade, which can be exchanged under Internal Revenue Code Section 1031 to defer capital gains taxes.
A limited partnership (LP) is a business structure where at least one partner is passive, with liability limited to their investment, and at least one partner with unlimited liability.
The Loan Constant, also known as the Mortgage Constant, is used to analyze the burden of debt repayment on a property and measure its ability to generate earnings sufficient to cover mortgage payments.
Locational Obsolescence, also known as Economic Obsolescence, refers to the depreciation or loss in property value due to external factors related to its location, which are beyond the control of property owners.
A Low-Income Housing Limited Partnership (LIHLP) is a partnership formed to fund and manage housing for low-income tenants. It offers investors potential returns primarily through tax deductions and credits rather than significant annual cash distributions.
A maintenance reserve is a fund allocated by property owners or a property management entity specifically for maintaining and repairing a property. This financial reserve is crucial to ensure that a property remains functional, safe, and visually appealing over time.
Marginal property refers to real estate that is barely profitable to use, indicating that the costs of operation, development, or purchase nearly equal or surpass the potential revenue or gains from the property.
A Master Limited Partnership (MLP) is an ownership vehicle commonly used for real estate or oil and gas ventures. It typically consolidates existing limited partnerships into a single, larger entity, offering more marketable ownership interests than individual limited partnerships.
A master mortgage loan refers to the collective mortgage debt secured on a building used for cooperative housing. Each co-op tenant-shareholder's obligation is separate from any individual loans used to purchase the respective co-op shares.
A comprehensive guide to understanding the impact and behavior of Millennials in the real estate market.
A mortgage is a legal agreement in which a lender provides a borrower with funds to purchase real estate. The property serves as collateral for the loan.
The Mortgage Constant is derived by dividing the total annual mortgage debt service, including both principal and interest, by the initial loan amount. It provides a useful way of calculating the annual cost of a loan as a percentage, making it easy to compare different mortgage options.
A Mortgage Real Estate Investment Trust (mREIT) is a company that specializes in investing in mortgage obligations, typically providing financing for income-producing real estate by purchasing or originating mortgage loans and mortgage-backed securities.
Mortgage-Backed Bonds (MBBs) are a type of bond that is secured by a pool of mortgage loans, providing investors with regular interest payments derived from the underlying mortgage payments.
A move-up home refers to a property that is larger, more expensive, or better equipped than a starter home, often acquired by individuals or families who have increasing financial stability and changing needs.
Multifamily housing represents residential structures containing more than one dwelling unit within the same building, designed to accommodate multiple households. These types of properties range from smaller multi-unit buildings like duplexes to larger apartment complexes.
NAREIM provides members the opportunity to exchange best practices, share strategic insights, and address challenges in managing real estate investments. The organization focuses on enhancing the expertise and professionalism of its members through various forums, research, and networking opportunities.
NAREIT is the preeminent organization that represents and advocates for real estate investment trusts (REITs) and publicly traded real estate companies in the United States. It plays a crucial role in education, advocacy, and research to promote the growth and understanding of REITs.
NAREIM is an organization of professional real estate investment managers dedicated to advancing the values and practices of the real estate investment management industry.
The National Association of Real Estate Investment Trusts (NAREIT) is a trade association that represents the interests of real estate investment trusts (REITs) and publicly traded real estate companies. NAREIT provides data on REIT performance, industry definitions, and serves as an advocate for the real estate investment industry.
The National Real Estate Investors Association (NaREIA) provides a nationwide network for real estate investors, offering resources such as educational tools, networking opportunities, and advocacy for investor-friendly legislation.
A national tenant is a lessee with a presence across many or most of the United States. These entities are typically well-known and have better credit compared to local tenants, making them desirable for commercial property owners and lenders.
Negative cash flow occurs when an income-generating property allows more expenses than revenue within a given period, causing the property owner to cover the shortfall from other investments or personal savings.
Net Income Before Recapture, also referred to as Net Operating Income (NOI), represents a real estate property's revenue minus all operating expenses, excluding income taxes and financing costs. It provides a useful metric for real estate investors to gauge a property’s profitability and investment potential before tax considerations and possible recapture of depreciation.
The Net Income Multiplier (NIM) is a valuation metric used to estimate a property's market value based on its Net Operating Income (NOI). It provides investors with a quick method to gauge the return on investment and compare property values within a specific market or region.
Net Present Value (NPV) is a crucial financial metric used to evaluate the profitability of an investment. By assessing the present value of expected future cash flows, NPV helps investors and businesses make informed decisions.
Net Yield refers to the return on an investment after subtracting all expenses associated with the investment.
A real estate acquisition strategy where buyers use minimal or no cash down payments, often relying on seller financing, existing loan assumption, or other creative financing methods to achieve maximum leverage.
Nonrecourse financing refers to loans secured by collateral, typically real estate, where the lender's ability to recover the debt is limited to the proceeds from the sale of that collateral alone, with no further recourse to the borrower's other assets.
The NPI, or National Property Index, is a property performance index maintained by the National Council of Real Estate Investment Fiduciaries (NCREIF).
An office building is a structure primarily used for conducting business activities such as administration, clerical services, and client consultations. These buildings can vary in size and may house one or multiple business concerns.
An operating budget outlines a reasonable expectation of future income and expenses from property operations, playing a crucial role in financial planning and management within real estate investments and enterprises.
The Operating Expense Ratio (OER) is a key metric used in real estate to measure the efficiency of a property's management by comparing its operating expenses to its potential gross income. A lower OER indicates a more efficiently managed property.
Operating expenses in real estate refer to the costs incurred to operate and maintain a property. These include expenses like property taxes, utilities, hazard insurance, and maintenance, while excluding financing expenses and depreciation.
Operating leverage refers to the automatic increases in net operating income (NOI) or cash flow of income-producing real estate when income and expenses increase at the same rate; this effect is further enhanced when expenses are fixed.
An option to purchase is a contract granting the holder the right, but not the obligation, to buy a property at a specified price within a set timeframe, subject to pre-defined conditions.
Original Equity refers to the initial amount of cash invested by the underlying real estate owner. It is distinct from concepts like sweat equity and capital calls, forming the base for calculating the owner's financial stake in the property.
Other People’s Money refers to borrowed funds that are invested in a money-making venture. This strategy uses debt to maximize investment profits or minimize the risk of personal loss. The underlying principle is financial leverage, which can significantly affect the return on investment.
The Overall Capitalization Rate (Cap Rate) is a metric used to evaluate the return on investment of a real estate property, usually expressed as a percentage. It helps investors determine the potential profitability of a property by comparing the annual net operating income (NOI) to the property's current market value or acquisition cost.
The Overall Rate of Return (OAR) is a metric that calculates the percentage yield of a property based on its Net Operating Income (NOI) divided by the property’s purchase price. This metric helps investors evaluate the profitability of real estate investments and compare different properties.
Paper profit refers to the unrealized gain in value of a property which would be realized if the property were sold at its current market value. As long as the property remains unsold, the profit remains a 'paper' valuation and is not actual profit.
A partnership is an agreement between two or more entities to enter into a business or investment together, where each partner may bind the other within the scope of their arrangement, and all partners share liability for the partnership's debts.
Pass-Through Certificates (or Securities) represent interests in a pool of mortgages sold by mortgage bankers to investors, where money collected as monthly mortgage payments is distributed to certificate holders. These securities are often guaranteed by agencies like Ginnie Mae.
A passive investor is an individual who invests money into a business, project, or property without taking an active role in managing or operating it. This hands-off approach allows investors to potentially earn income while leveraging the expertise and efforts of others.
A nonprofit organization devoted to enhancing real estate investment by pension funds. PREA provides education, research, and advocacy to assist institutional real estate investment.
A penthouse is a luxury housing unit located on the top floor(s) of a high-rise building, often distinguished by premium views, expansive layouts, high-end finishes, and exclusive amenities.
Periodic cash flow refers to the regular intervals of revenue generation and expenses within a specific timeframe for a real estate investment, providing insights into the liquidity and profitability of the property.
Phantom taxable income occurs when reported taxable income exceeds actual cash flow, often due to tax-related factors such as depreciation deductions that have been fully utilized.
Physical life refers to the expected period of time during which a real estate improvement or structure is expected to remain physically intact and usable if proper maintenance is conducted.
Plottage value refers to the increased value that results when multiple smaller adjacent plots of land are combined into a single larger plot. This increase in value is due to the greater potential utility and development options that the larger plot offers compared to the individual smaller plots.
Positive cash flow in real estate indicates that rental income exceeds property-related expenses, ensuring profitability and sustainability.
Positive leverage refers to the use of borrowed funds that enhances the return on investment. It indicates that the cost of borrowing is lower than the return generated by the investment.
PREA (Pension Real Estate Association) is a non-profit trade association dedicated to serving pension funds and other institutional investors involved in real estate investment.
Premium has multiple meanings in real estate: it refers to the cost of an insurance policy, the value of a mortgage or bond in excess of its face amount, and the amount over market value paid for some exceptional quality or feature.
A pro-forma statement is a financial document that projects future income and expenses for a property, enabling investors and developers to make informed decisions based on estimated financial performance.
Proceeds from resale refer to the total amount of money received from selling a property, after accounting for any associated costs and expenses.
The projection period refers to the time duration over which future cash flows and resale proceeds from a proposed real estate investment are estimated. It plays a crucial role in evaluating the potential profitability and financial viability of real estate ventures.
Proprietorship refers to the ownership of a business, including income-producing real estate, by an individual, as opposed to a partnership or corporation. This ownership structure allows for direct control of property and income but comes with specific risks and benefits.
A PUD or Planned Unit Development is a type of real estate development designed to maximize land use efficiency by integrating residential, commercial, and sometimes industrial units within a single community. PUDs often feature a variety of property types, such as single-family homes, townhomes, apartments, and commercial spaces, along with shared amenities and open spaces.
Purchase capital is the total amount of money used to acquire real estate, irrespective of its source, encompassing both equity and debt components.
A quadraplex, also known as a four-plex, is a type of real estate property that consists of four separate units within one building. Each unit can be rented out individually, offering multiple income streams for property investors.
Raw land refers to undeveloped land that lacks improvements such as buildings, utilities, streets, drainage, and landscaping. Often, raw land is purchased for development purposes, such as constructing residential subdivisions or commercial properties.
A Real Estate Mortgage Investment Conduit (REMIC) is an entity created for the purpose of holding a fixed pool of mortgages and issuing mortgage-backed securities to investors in a tax-efficient manner.
A real estate property tax deduction allows homeowners to reduce their taxable income by the amount they pay in property taxes. This deduction can be claimed on an individual's federal income tax return under itemized deductions.
Recapture of depreciation is a tax provision where the IRS recovers depreciation deductions upon the sale of an asset, often leading to significant tax implications for the property owner.
Rehabilitating a property involves restoring a structure to a condition of good repair, making it functional and habitable again, and potentially increasing its value.
Rehabilitation Tax Credit provides a tax incentive for property owners to invest in the preservation of historic and other qualifying buildings.
A REIT ETF (Real Estate Investment Trust Exchange-Traded Fund) is an ETF that focuses on investing in equity REITs or mortgage REITs. These funds are traded on stock exchanges like regular stocks and typically have lower fees and provide greater diversification compared to traditional real estate mutual funds.
Rent control refers to a set of laws and regulations that limit the rate at which rents can increase over time.
The rent-up period refers to the span of time it takes for newly constructed properties or newly vacated buildings to achieve full occupancy through tenant leasing. This phase is crucial for property owners and developers as it significantly impacts potential revenue and return on investment.
