The great tradeoffs of real estate investing

Glossary

1031 exchange: A tax rule that lets you sell an investment property and roll the gains into another one without paying capital-gains tax right away.
Accredited investor: Someone who meets income or net-worth thresholds set by the SEC, which lets them invest in private deals like most syndications.
ADU: Accessory Dwelling Unit — a small second home on a property, like a converted garage, basement unit, or backyard cottage, that can be rented.
Amortization: The way a loan is paid down over time. Early payments are mostly interest; over the years more goes toward the balance you owe.
Appraisal: A licensed appraiser's independent estimate of a property's value. Lenders require it so they don't lend more than the property is worth.
Appreciation: A property rising in value over time. You don't touch this money until you sell or borrow against it, but it's where a lot of long-term wealth is built.
ARV: After Repair Value — what a property will be worth once renovations are done. Flip and BRRRR math lives or dies on getting this estimate right.
Assignment fee: The profit a wholesaler makes by putting a property under contract and selling that contract to another buyer — without ever owning it.
Balloon payment: A large lump sum due at the end of certain loans, after smaller regular payments. You need a plan — refinance or sell — before it comes due.
Bridge loan: A short-term loan that covers you between two deals — like buying a new property before your old one sells.
BRRRR: Buy, Rehab, Rent, Refinance, Repeat — a strategy where you fix up a property, refinance to pull your cash back out, and reuse it on the next deal.
Buy-and-hold: Buying a property and keeping it for years as a rental — earning monthly cash flow while it (hopefully) rises in value and the loan gets paid down. The classic long-term rental approach.
Cap rate: A property's yearly net income divided by its price, as a percent. A quick way to compare how much income different properties throw off.
CapEx: Capital Expenditures — big-ticket replacements like a roof, furnace, or water heater. Set money aside monthly so these don't wipe out your returns.
Capital: The money you have available to invest — your own cash, plus what you can borrow or raise from partners.
Cash flow: What's left in your pocket each month after every expense is paid — rent minus mortgage, taxes, insurance, repairs, and management.
Cash-on-cash return: Your yearly cash flow divided by the actual cash you put in, as a percent. It answers 'what is my money earning?' better than price-based measures.
Cash-out refinance: Refinancing for more than you owe and taking the difference in cash — a way to tap your equity without selling. Central to the 'R' in BRRRR.
Closing: The final step where money and documents change hands and you officially own the property. 'Closing costs' are the fees paid here.
Closing costs: The fees to finalize a purchase — lender fees, title, appraisal, taxes — usually 2–5% of the price, paid on top of your down payment.
Comps: Comparable sales — recently sold nearby properties similar to yours, used to estimate value. The foundation of any offer or ARV.
Contingency: A condition in a contract that lets you back out without losing your deposit — like a financing, inspection, or appraisal contingency.
Conventional loan: A standard mortgage not backed by a government program. Usually needs decent credit and a larger down payment than FHA or VA loans.
Credit score: A number (roughly 300–850) summarizing how reliably you repay debt. A higher score unlocks better loan rates and terms.
Deed: The legal document that transfers ownership of a property from seller to buyer. Signed and recorded at closing.
Depreciation: A tax deduction that lets you write off a building's value over time, lowering taxable income even while the property may be rising in value.
Distressed property: A property in poor condition or whose owner is under financial pressure. Often sells below market — the raw material for flips and BRRRR.
Down payment: The chunk of the purchase price you pay upfront in cash; the rest is covered by your loan. Often 3–25% depending on the loan and property.
DSCR: Debt Service Coverage Ratio — whether a property's income covers its loan payment. Lenders use it to qualify a loan on the property, not your paycheck.
DTI: Debt-to-Income ratio — your monthly debt payments divided by your income. Lenders use it to judge how much more you can safely borrow.
Due diligence: The investigation period after an offer is accepted — inspections, reviewing documents, verifying numbers — before you're locked in.
Earnest money: A good-faith deposit you put down when your offer is accepted, showing you're serious. It goes toward your costs at closing.
Equity: The slice of a property you actually own — its current value minus what you still owe. A $300,000 home with a $200,000 loan gives you $100,000 of equity.
Escrow: A neutral third party that holds money or documents during a deal (and sometimes your taxes and insurance after) until conditions are met.
FHA loan: A government-backed mortgage with a low down payment (as little as 3.5%) and easier credit requirements — popular for first-time and house-hacking buyers.
Flip: Buying a run-down property, renovating it, and reselling it for a profit, ideally within months. Bigger potential payoff, but more risk, skill, and cash required than renting.
Foreclosure: The legal process where a lender takes back a property after the owner stops paying the mortgage. Can be a source of discounted deals.
General Partner: The person who runs a group deal — finds it, finances it, and manages it. Also called the sponsor.
GRM: Gross Rent Multiplier — a property's price divided by its yearly rent. A rough, quick screen for whether a deal is worth a closer look.
Hard money: A short-term, high-interest loan from a private lender, based on the property's value rather than your income. Common for flips and fast BRRRR deals.
HELOC: Home Equity Line of Credit — a revolving loan against the equity in a home you own, that you can draw from as needed.
Home inspection: A professional walk-through that flags a property's condition and problems before you buy — foundation, roof, systems, and more.
House hacking: Living in one part of a property while renting out the rest — a spare room, or the other unit of a duplex — so your tenants help cover the mortgage. A popular low-money-down way beginners get started.
Interest rate: The yearly cost of borrowing, as a percent of the loan. A lower rate means a smaller monthly payment and far less paid over the life of the loan.
IRR: Internal Rate of Return — a single percent that blends cash flow and eventual sale profit over time. Used to compare deals with different timelines.
Lease: The contract that sets the rules of a rental — rent, length, deposit, responsibilities — binding both landlord and tenant.
Leverage: Using borrowed money to control more than your cash alone could buy. It multiplies both gains and losses — powerful and risky.
Lien: A legal claim against a property for an unpaid debt — a mortgage, unpaid taxes, or a contractor's bill. Liens must usually be cleared before a sale.
Limited Partner: A passive, hands-off investor in a deal — you put in money and share in the returns, but don't run the property.
Liquidity: How quickly you can turn something into cash without losing value. Cash is liquid; a property is not — selling takes time.
LTV: Loan-to-Value — the loan amount as a percent of the property's value. Lower LTV means more equity and less risk for the lender.
MLS: Multiple Listing Service — the database agents use to list properties for sale. 'On-market' deals are here; 'off-market' ones aren't.
Mortgage: A loan used to buy property, where the property itself is the collateral. Miss enough payments and the lender can take it back through foreclosure.
Multifamily: A building with more than one rental unit — a duplex, triplex, or fourplex up to large apartment complexes. More units can mean more cash flow.
NOI: Net Operating Income — a property's income minus its operating expenses, before the mortgage. The core number for valuing income property.
Off-market: A property for sale that isn't publicly listed on the MLS. Less competition, but you have to find these through networking or direct outreach.
Operating expenses: The ongoing costs to run a property — taxes, insurance, maintenance, management, utilities — not counting the mortgage payment.
Owner-occupied: A property where you live in one part while renting out the rest, or simply live in yourself. It unlocks better, lower-down-payment loans.
Passive income: Money that comes in without your active, ongoing work — like rent from a turnkey rental or distributions from a syndication.
PITI: The four parts of a typical mortgage payment: Principal, Interest, Taxes, and Insurance. Budgeting only for principal and interest is a classic beginner miss.
PMI: Private Mortgage Insurance — an extra monthly charge lenders require when your down payment is under 20%. It protects the lender, not you, and can be removed later.
Points: Upfront fees paid to a lender to lower your interest rate, each point costing 1% of the loan. Paying points can pay off if you hold the loan long enough.
Pre-approval: A lender's written estimate of how much they'll likely lend you, based on a real look at your finances. It tells you your budget and makes your offers stronger.
Preferred return: A promised first slice of profits that passive investors get before the sponsor takes their share. A common way syndications align interests.
Principal: The actual amount you borrowed, separate from interest. Each mortgage payment chips away at the principal while also covering interest.
Private money: Money borrowed from an individual — a friend, family member, or private investor — on terms you negotiate directly, rather than from a bank.
Promissory note: The written IOU that spells out a loan's terms — amount, interest, and repayment. Buying these is the essence of note investing.
Property management: Handling the day-to-day of a rental — tenants, rent, repairs, turnover. You can do it yourself or hire a manager for roughly 8–12% of rent.
Refinance: Replacing your current loan with a new one — usually to get a lower rate, change the term, or pull out cash. It resets the clock and has its own closing costs.
REIT: Real Estate Investment Trust — a company that owns income-producing property. You buy shares like a stock, for fully passive exposure.
Rent roll: A snapshot of all the rent a property brings in — unit by unit, who's paying what and for how long. Key when sizing up a multi-unit deal.
REO: Real Estate Owned — a property the bank took back at foreclosure and now wants to sell. Often listed like any other home, sometimes at a discount.
Reserves: Cash set aside to cover surprises — a vacancy, a broken furnace, a slow month. Under-reserving is the most common beginner mistake.
ROI: Return on Investment — how much you earn measured against how much you put in, as a percent. The basic scorecard for 'was it worth it?'
Section 8: A federal program where the government pays part of a tenant's rent directly to the landlord. Reliable payments, but more rules and inspections.
Seller financing: The seller acts as the bank, letting you pay them over time instead of getting a mortgage. Useful when bank financing is hard or the seller wants steady income.
Short sale: A sale where the lender agrees to accept less than what's owed on the mortgage. Slow to close but sometimes a bargain.
Sponsor: The person or team that finds, funds, and runs a group real estate deal. Same role as the General Partner in a syndication.
Sweat equity: Value you build through your own labor rather than cash — doing the rehab yourself, managing your own rental, or finding your own deals.
Syndication: A group investment where many people pool money to buy a large property, run by a lead sponsor. You invest passively as a limited partner.
Tenant: The person who rents and lives in your property under a lease, paying you rent in exchange.
Title: Legal ownership of a property. A clear title means no hidden claims or debts attached before you buy.
Title insurance: A one-time policy that protects you if someone later challenges your ownership or an old lien surfaces. Standard part of closing.
Turnkey rental: A rental that's already renovated, often already rented and managed, so you can buy it and collect income with little hands-on work.
Under contract: The stage after an offer is accepted but before closing, while contingencies are worked through. The deal isn't final yet.
Underwriting: Running the numbers on a deal to judge whether it's actually good — income, expenses, financing, and risk — before you buy.
VA loan: A mortgage guaranteed by the Department of Veterans Affairs for eligible service members and veterans, often with no down payment and no PMI.
Vacancy rate: The share of time a rental sits empty and earning nothing. Smart underwriting always budgets for some vacancy, not 100% occupancy.
Wholesaling: Putting a property under contract at a low price and selling that contract to another buyer for a fee, without ever owning it. Takes little cash, but it's an active hustle, not passive income.