Learn about the top property management and rental investment terms you should know as a rental homeowner. These real estate terms will help you to succeed as an investor or landlord! In order to walk the walk, you must first lean to talk the talk. Below we define all the landlord, property owner and investor terms you should know.
45 Property Management & Rental Investment Terms to Know
Definition: Appreciation refers to the increase in the value of a property over time. Appreciation can be caused by a number of things including inflation, the increase in demand or a decrease in supply of properties. Appreciation can also take into account 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.
Definition: 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.
Definition: 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 and property-specific. 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.
Definition: 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.
Definition: Cash flow is the flow of money in and out of a business, or in the case of a property, it’s 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
Definition: 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
Definition: 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.
Commercial Real Estate
Definition: Commercial real estate is defined in opposition to residential real estate. The definition of commercial properties encompasses industrial properties, medical facilities, office buildings, retail centers, and multifamily complexes. It can also refer to land that will be developed into a commercial project in the future.
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.
Definition: 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 as long as they are connected. Usually, a rental-home duplex has two separate entrances, one for each family/group renting the space.
Equal Housing Opportunity
Definition: 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.
Definition: Equity is essentially how much the stake in ownership on a property is worth; it is the difference between the current market value of a property and the amount owned by the owner on a mortgage (if any). As a mortgage gets paid off the owner’s equity grows.
When a property is sold, the equity is the difference between the purchase price and the sale price. The market drives the property’s equity but improving and upgrading the property can increase it.
Definition: 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.
By placing funds in escrow, a home buyer has the ability to perform due diligence on a potential acquisition, and also assure the seller that the buyer has enough money to close on the purchase or the property. Once the deal has been agreed upon and finalized, the money in escrow will be released to the home seller.
Definition: 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 marijuna- growing facility in a home. After an eviction notice is served, also known as “Notice to Quit”, the resident has a set amount of days to vacate the rental property.
Fair Housing Act
Definition: The Fair Housing Act protects people from discrimination when they are renting or buying a home, applying for a mortgage, seeking housing assistance, or engaging in other housing-related activities. Additional protections apply to federally-assisted housing.
Regarded as one of the country’s greatest achievements in recent history, the Fair Housing Act was created to treat every person the same when purchasing, selling, and/or renting properties, regardless of their gender, race, religion, etc.
Internal Rate of Return (IRR)
Definition: 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.
Definition: 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.
Definition: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.
Definition: 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.
Definition: 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.
Definition: A lease renewal is 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 (and often similar) 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.
Definition: 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.
While slightly riskier, using leverage is advantageous to investors as it provides higher returns, enables them to diversify across multiple properties. For example, an investor can purchase one property for $100,000. The same investor can get four properties of $100,000 each, by putting down $25,000 on each property.
Definition: 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: This type of maintenance 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. Risk-based maintenance are maintained and monitored more frequently than the others.
- 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 taking action when certain indicators show signs of decreasing performance or upcoming failure.
Definition: 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.
Definition: 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.
Definition: 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.
Definition: 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 inspections 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 of the walls, removal or addition of light fixtures, closet doors or cabinets missing, and so on.
Definition: The one percent rule refers to the rent to expense ratio an investment property must have in order to be profitable. While there are a number of 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
Definition: 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. Typically, a real estate agent represents the seller of a home or property.
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. Please check your local rules and regulations for more information on real estate agents in your area.
Real Estate Owned (REO)
Definition: A 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.
Definition: 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.”
Definition: Rehabilitation, also known as a rehab, refers to the repairs that need to be done to make an asset tenant-ready. Prior to purchase, properties are given a primary inspection by our ILMs to ensure that extensive repairs are not necessary.
Rehabs can include minor fixes such as paint and lighting upgrades but can also extend to more large-scale repairs such as roof replacement and plumbing upgrades.
Should such large-scale upgrades be necessary, the investor will be notified prior to purchase and can choose to forego the purchase. Rehabilitation costs are generally included in the purchase price.
Turn-key Properties are rent-ready, and do not need any rehabilitation.
Definition: Remote investing empowers investors to own property that is geographically removed from their own primary residence. Traditionally real estate investors tend to purchase property that is “in their backyard” so they can keep an eye on their investment. This generally means that the investor is also a landlord and must keep up with the daily maintenance of the property.
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.
Definition: A repair refers to a specific fix to a rental property that brings the unit back to a good, habitable condition. Further explained, a repair 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 (as opposed to improving the asset). 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. An improvement would mean work done to the home that would significantly improve or add value to the property.
Definition: 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)
Definition: 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 takes into account 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.
Definition: A tenant who wants to occupy a rental unit provides the property owner with a downpayment 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 (i.e. leaves the property before the time they were supposed to) or the property needs to be cleaned and/or fixed.
Self Directed IRA (SDIRA)
Definition: A SDIRA or Self Directed Individual Retirement Account is a type of account that provides tax benefits to money deposited for retirement. Any income from the account is taxed at the tax bracket the account holder reaches upon retirement, which is often much lower than their pre-retirement tax bracket.
The only difference between a SDIRA and a typical IRA account is the type of investments the account holder is permitted to make. In addition to traditional stocks and bonds a SIDRA can be used to invest in alternative investments such as real estate, tax liens, and notes.
The money in the account can be invested just as the funds in any standard account can as long as the dividends are returned to the account. Funds cannot be accessed until the account holder reaches retirement. Additionally, all asset expenses must be paid for using funds from the account.
A SDIRA has the ability to hold a mortgage through the terms differ from traditional mortgages. This loan, called a non-recourse loan, is often at a higher rate than a traditional mortgage. It does allow investors to leverage their funds to create a greater ROI.
Definition: During a self-showing, prospective tenants view a rental property by themselves, without anyone accompanying them. An agent, manager or landlord typically uses a lock box or smart lock to leave the keys at the property for the prospective tenant(s) to view the unit when it's convenient for them. Prospective tenants attending a self-showing receive a code for that lockbox and access the unit in this way.
New technology plays an important role in helping property owners ensure there will be no damage to the property or that the individuals will take off with the keys. The devices used for self-showings are built off software that can be controlled remotely. This software allows users to set up unique access codes for each individual self-showing. The interested prospects will be required to submit personal information to confirm who they are including uploading a photo ID before they even attend a self-showing.
The owner or property manager can set restrictions, such as limiting showings to certain hours of the day. Self-showings enable a prospect to tour properties 12 hours a day, 365 days per year.
Single Family Rentals (SFRs)
Definition: 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. Families tend to want to stay in one place for longer, especially when they have children. Mynd Management offers fully managed SFRs investments across a wide variety of markets in the US.
Definition: This is a short-term housing arrangement between the current tenant (sublessor) and a temporary occupant, also known as the subtenant or subletter. Subletting is usually done without the landlord's direct involvement.
When subletting, the current tenant and potential subletter agree on a period of time 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 rents part or all of 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.
Definition: The word “subsidies” means: benefits given to an individual, business, or institution and it is usually given by the government. It can be given in the form of a cash payment or a tax reduction.
In residential real estate, subsidies are direct or indirect. Direct subsidies refers to an actual payment of funds that can be given to an individual, a group or an industry.
Indirect subsidies do not hold a predetermined monetary value or involve actual cash outlays. Indirect subsidies can include activities such as price reductions for required goods or services that can be government-supported.
Definition: Tenant damage refers to the loss or harm to a rental property caused by excessive abuse or misuse by the tenant for the duration of their stay in the property. This damage (or neglect) results in reduced value, usefulness, etc., of the property. Damages can be inflicted by the tenants, their guests, or pets and will usually result in the landlord deducting the tenant damages from a resident’s security deposit.
As long as this does not include normal wear-and-tear damages by the tenant, the damages can usually be deducted from a security deposit.
Tenant damages should be differentiated from the normal wear and tear (which refers to the normal deterioration that a property will experience as tenants reside in it such as worn carpet or faded paint). To be considered tenant damage, the severity of the damage might include, but is not limited to, stained or burnt material, clogged toilets or broken glass. Check local law and regulations to learn more about tenant damages in each city or state.
A property manager or rental home owner should have a clear set of rules that will help the tenant differentiate between normal wear and tear and tenant damage, this should be defined in the rental agreement lease. Normally, the amount required to repair the damages that exceeded normal wear and tear of the property can be deducted from the tenant’s security deposit, if sufficiently explained in the lease agreement.
Definition: 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 make a decision.
The 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. Please check with local laws and research regulations before completing a tenant screening. Most property management companies are well versed in tenant screening and can complete this process for any real estate owner.
Turn Key Property (TKP)
Definition: 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.
Definition: 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.
Definition: 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.
Definition: 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.
Definition: There are three different types of a vacancy rate. This first, physical vacancy, refers to the amount of time a rental property remains vacant, un-rented, over a 1-year period and also considers the total number of vacant units at a given time. Next, 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). Lastly, 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.
Definition: 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 with regard to 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 property management team members! We look forward to educating you.