Investor Education

Real Estate Investment Glossary

35 essential real estate investing terms defined clearly and concisely. Formulas, examples, and cross-references included. Written for investors, by investors.

1031 Exchange

A 1031 exchange is a tax-deferral strategy under Section 1031 of the Internal Revenue Code that allows real estate investors to sell an investment property and reinvest the proceeds into a "like-kind" property while deferring capital gains taxes. The exchange must follow strict IRS timelines: the investor has 45 days to identify a replacement property and 180 days to close on it. A qualified intermediary must hold the funds during the exchange period -- the seller cannot touch the money directly. According to the National Association of Realtors, 1031 exchanges account for 10-15% of all commercial real estate transactions annually. Both properties must be held for investment or business use (not personal residences). Investors can perform multiple sequential 1031 exchanges over a lifetime, effectively deferring capital gains indefinitely until a taxable sale occurs or the property passes to heirs at a stepped-up basis.

Example

You sell a rental duplex for $400,000 with $100,000 in capital gains. Instead of paying approximately $20,000 in federal capital gains tax, you identify a fourplex for $500,000 within 45 days and close within 180 days, deferring the entire $100,000 gain.

70% Rule

The 70% Rule is the most widely used formula in house flipping for calculating the maximum price an investor should pay for a property. The rule states that an investor should pay no more than 70% of the After Repair Value (ARV) minus the estimated rehab costs. The remaining 30% provides a buffer for holding costs, closing costs (buying and selling), real estate agent commissions, financing costs, unexpected expenses, and the investor's profit. The 70% Rule is a guideline, not an absolute -- experienced investors may adjust the percentage based on market conditions, their risk tolerance, and the specific deal. In very competitive markets, investors sometimes go up to 75-80% of ARV, accepting thinner margins for the opportunity to secure deals. In slower markets, conservative investors may stick to 65% to account for longer holding times and potential price corrections. According to BiggerPockets' annual survey, the majority of successful house flippers report using the 70% Rule or a close variation as their primary offer calculation.

FormulaMaximum Purchase Price = (ARV x 70%) - Estimated Rehab Costs

Example

ARV: $250,000. Estimated rehab: $35,000. Maximum offer = ($250,000 x 0.70) - $35,000 = $175,000 - $35,000 = $140,000. The 30% buffer ($75,000) covers your expected profit, holding costs, financing, and transaction costs.

Appraisal

An appraisal is a professional, unbiased estimate of a property's market value conducted by a licensed appraiser. Lenders require appraisals before approving a mortgage to ensure the property is worth at least the loan amount. The appraiser inspects the property, evaluates its condition, and compares it to recent comparable sales (comps) in the area. The three standard valuation approaches are the sales comparison approach, the cost approach, and the income approach (for rental properties). Appraisals typically cost between $300 and $600 for a single-family home, though complex or high-value properties may cost more. According to the Appraisal Institute, the typical margin of error for a residential appraisal is 5-10%, which is why investors often perform their own independent ARV calculations before making offers.

Example

A lender orders an appraisal before funding your $250,000 purchase. The appraiser values the property at $245,000, meaning the bank will only lend based on the lower figure. You must cover the $5,000 gap out of pocket or renegotiate the purchase price.

Appreciation

Appreciation is the increase in a property's value over time. It is one of the four primary ways real estate investors build wealth, alongside cash flow, mortgage paydown, and tax benefits. Natural (or market) appreciation occurs due to broader economic factors such as population growth, job creation, inflation, and limited housing supply. According to the Federal Housing Finance Agency (FHFA), U.S. home prices have appreciated an average of 4.3% annually since 1991. Appreciation is unrealized gain until the property is sold or refinanced, meaning it exists on paper but does not produce spendable income. While appreciation can accelerate wealth building, sophisticated investors treat it as a bonus rather than the primary investment thesis, since market downturns can temporarily erase gains.

Example

You purchase a property for $200,000. Over five years, the local market appreciates at 5% per year. The property is now worth approximately $255,256 -- a gain of $55,256 without any improvements.

ARV (After Repair Value)

After Repair Value (ARV) is the estimated market value of a property after all planned renovations and repairs are completed. ARV is the most critical number in fix-and-flip and BRRRR investing because it determines your maximum offer price, expected profit margin, and refinance potential. To calculate ARV, investors analyze 3-6 comparable sales (comps) of recently renovated properties within a half-mile radius that sold in the last 90-180 days. Each comp is adjusted for differences in square footage, bedroom/bathroom count, lot size, condition, and location. According to ATTOM Data Solutions, the average gross profit on a house flip in Q3 2024 was $73,500, representing a 30.4% return on investment -- but accuracy of the ARV estimate is the single biggest factor in whether a flip is profitable or not. An inflated ARV leads to overpaying; a conservative ARV protects your downside.

FormulaARV = Average Adjusted Sale Price of Comparable Renovated Properties

Example

Three renovated comps in the neighborhood sold for $280,000, $295,000, and $290,000. After adjusting for differences, the adjusted values are $285,000, $288,000, and $292,000. Your ARV estimate is ($285,000 + $288,000 + $292,000) / 3 = $288,333.

Assignment Fee

An assignment fee is the profit a wholesaler earns by assigning their purchase contract to an end buyer. When a wholesaler puts a property under contract at one price and assigns that contract to another investor at a higher price, the difference is the assignment fee. Assignment fees typically range from $5,000 to $20,000 on residential deals, though they can be significantly higher on commercial properties or in hot markets. The fee is disclosed at closing and paid through the title company or closing attorney. Some states regulate the disclosure of assignment fees, and certain sellers or lenders may include anti-assignment clauses in their contracts. Wholesalers must ensure their purchase agreements contain an "and/or assigns" clause to legally transfer the contract to another buyer.

Example

You put a distressed property under contract for $120,000 and find an investor willing to pay $135,000 for it. You assign the contract and earn a $15,000 assignment fee at closing without ever owning the property.

BRRRR Method

The BRRRR method stands for Buy, Rehab, Rent, Refinance, Repeat -- a real estate investment strategy designed to build a rental portfolio with minimal capital by recycling your initial investment. The investor buys a distressed property below market value (often with cash or hard money), completes renovations to increase its value (forced appreciation), rents it to a tenant for stable cash flow, refinances with a conventional mortgage based on the new appraised value to pull out most or all of the original investment, and then repeats the process with the recovered capital. Popularized by the BiggerPockets community, BRRRR is one of the most efficient strategies for scaling a rental portfolio. The key to a successful BRRRR is buying at a deep enough discount that the refinance covers your total investment (purchase price plus rehab costs plus holding costs). Most lenders require a 6-12 month seasoning period before allowing a cash-out refinance based on the new appraised value.

Example

You buy a distressed property for $100,000 cash and spend $40,000 on rehab (total: $140,000). After renovations, it appraises at $200,000. You do a cash-out refinance at 75% LTV ($150,000), recovering your full $140,000 investment plus $10,000. You now own a cash-flowing rental with none of your own capital tied up.

Buy and Hold

Buy and hold is a long-term real estate investment strategy where an investor purchases a property and retains ownership for an extended period, generating income through rental cash flow while benefiting from appreciation, mortgage paydown, and tax advantages. This is the most common strategy among wealth-building real estate investors. The investor earns monthly cash flow (rent minus expenses), builds equity as the tenant pays down the mortgage, captures appreciation as the property value increases over time, and receives tax benefits through depreciation deductions. According to the U.S. Census Bureau, approximately 70% of rental properties in the United States are owned by individual investors rather than corporations. Buy-and-hold investors typically target properties with strong rent-to-price ratios (1% rule or better) in markets with population growth, job diversification, and landlord-friendly regulations.

Example

You purchase a single-family rental for $180,000 with $36,000 down. It rents for $1,600/month with $1,200 in total expenses (PITI + maintenance + vacancy). You cash flow $400/month ($4,800/year) while the tenant pays down your mortgage and the property appreciates.

Cap Rate

Capitalization rate (cap rate) is the ratio of a property's net operating income (NOI) to its current market value or purchase price. It is the most widely used metric for evaluating and comparing income-producing real estate investments. Cap rate represents the unlevered return an investor would earn if they purchased the property with all cash (no mortgage). A higher cap rate indicates a higher return relative to the price, but often comes with higher risk. Cap rates vary significantly by market, property type, and condition. According to CBRE Research, average cap rates for multifamily properties in the U.S. ranged from 4.5% to 7.5% in 2024, with Class A urban properties at the lower end and Class C suburban properties at the higher end. Cap rate is most useful for comparing similar properties in the same market rather than across different asset classes or geographies.

FormulaCap Rate = Net Operating Income (NOI) / Property Value x 100

Example

A rental property generates $24,000 per year in NOI (gross rent minus operating expenses, excluding mortgage). The property is listed at $300,000. Cap rate = $24,000 / $300,000 = 8.0%. This means you would earn an 8% annual return on an all-cash purchase.

Cash Flow

Cash flow is the net income remaining after all operating expenses, debt service (mortgage payments), and reserves are subtracted from a rental property's gross income. Positive cash flow means the property generates more income than it costs to own and operate each month. Cash flow is the lifeblood of rental property investing because it provides immediate, spendable income while other wealth-building mechanisms (appreciation, equity buildup, tax benefits) work in the background. Experienced investors calculate cash flow conservatively by including vacancy reserves (typically 5-8% of gross rent), maintenance reserves (5-10%), capital expenditure reserves (5-10%), and property management fees (8-10%) even if they self-manage. A common benchmark is the "1% rule" -- if monthly rent equals at least 1% of the purchase price, the property is likely to cash flow positively. However, this is a screening tool, not a replacement for full underwriting.

FormulaCash Flow = Gross Rent - (Operating Expenses + Debt Service + Reserves)

Example

Monthly gross rent: $1,800. Expenses: $500 (taxes, insurance, maintenance reserves). Mortgage: $900. Monthly cash flow: $1,800 - $500 - $900 = $400. Annual cash flow: $4,800.

Cash-on-Cash Return

Cash-on-cash (CoC) return measures the annual pre-tax cash flow relative to the total cash invested in a property. Unlike cap rate, which ignores financing, cash-on-cash return accounts for leverage (mortgage), making it the go-to metric for investors who finance their purchases. It answers the question: "What percentage return am I earning on the actual dollars I put in?" A CoC return of 8-12% is generally considered solid for residential rental properties, though many investors target higher returns in appreciating or value-add markets. The metric is particularly useful for comparing investment opportunities that require different amounts of cash to acquire. One limitation is that CoC return does not account for appreciation, mortgage paydown, or tax benefits -- it only measures current income against invested capital.

FormulaCash-on-Cash Return = Annual Pre-Tax Cash Flow / Total Cash Invested x 100

Example

You invest $50,000 total cash (down payment + closing costs + rehab) into a rental property. It generates $6,000 per year in cash flow after all expenses and debt service. Cash-on-cash return = $6,000 / $50,000 = 12%.

Closing Costs

Closing costs are the fees and expenses paid at the time of a real estate transaction beyond the property's purchase price. For buyers, closing costs typically range from 2-5% of the purchase price and include items such as loan origination fees, appraisal fees, title insurance, title search, attorney fees, recording fees, escrow deposits, prepaid property taxes, and homeowner's insurance premiums. Sellers typically pay real estate agent commissions (5-6% of sale price), transfer taxes, and their share of prorated expenses. According to CoreLogic ClosingCorp, the average closing costs for a single-family home purchase in the U.S. were approximately $6,905 including taxes in 2024. For investors, closing costs are a critical component of total project cost and must be included in underwriting to avoid overpaying. Closing costs are generally not financeable with a conventional mortgage, meaning the investor must pay them out of pocket at the closing table.

Example

You purchase an investment property for $200,000. Your closing costs include: loan origination (1%, $2,000), appraisal ($500), title insurance ($1,200), attorney ($800), recording fees ($300), and prepaid taxes/insurance ($1,500). Total closing costs: $6,300, or 3.15% of the purchase price.

CMA (Comparative Market Analysis)

A Comparative Market Analysis (CMA) is a report prepared by a real estate agent or investor that estimates a property's market value by comparing it to similar properties that have recently sold, are currently listed, or are pending sale in the same area. A CMA is less formal than a licensed appraisal but serves a similar purpose: establishing what a property is likely worth in the current market. A thorough CMA examines 3-6 comparable properties within a 0.5-1 mile radius that sold within the last 3-6 months, with adjustments for differences in square footage, lot size, bedroom/bathroom count, condition, age, and amenities. For investors, CMAs are essential for determining both the as-is value (what the property is worth today) and the ARV (what it will be worth after renovation). Real estate agents frequently provide free CMAs to attract potential listing clients, but investors benefit from learning to perform their own analyses using MLS data and public records.

Example

You pull five recent sales within half a mile of a target property. After adjusting for a 200 sq ft difference (-$10,000), a missing bathroom (-$8,000), and a superior lot (+$5,000), the adjusted comp values average $235,000 -- your estimated market value.

Comparable Sales (Comps)

Comparable sales, commonly called "comps," are recently sold properties that are similar in size, condition, location, and features to a subject property being evaluated. Comps are the foundation of property valuation in real estate -- used by investors, appraisers, agents, and lenders to determine what a property is worth. The best comps share these characteristics with the subject property: sold within the last 90-180 days, located within 0.5-1 mile, similar square footage (within 10-15%), similar bedroom and bathroom count, similar lot size, similar age and condition, and similar construction type. Adjustments are made for any differences, such as adding value for extra bedrooms or subtracting for an inferior location. Investors typically use two sets of comps: "as-is" comps (distressed or unrenovated sales) to determine purchase price, and "renovated" comps to determine the ARV. Accessing accurate comp data through the MLS, public records, or tools like PropLab is essential for making competitive and profitable offers.

Example

Your subject property is a 1,400 sq ft 3-bed/2-bath ranch. You find three comps: a 1,350 sq ft 3/2 that sold for $270,000, a 1,500 sq ft 3/2 at $285,000, and a 1,400 sq ft 4/2 at $295,000. After adjustments, you arrive at an estimated value of $278,000.

DSCR (Debt Service Coverage Ratio)

Debt Service Coverage Ratio (DSCR) measures a property's ability to cover its debt obligations from its operating income. It is calculated by dividing the net operating income (NOI) by the total annual debt service (mortgage principal and interest payments). A DSCR of 1.0 means the property generates just enough income to cover its debt -- breakeven. A DSCR above 1.0 indicates positive cash flow; below 1.0 indicates a shortfall. Most commercial and investment property lenders require a minimum DSCR of 1.20-1.25, meaning the property must generate 20-25% more income than required for debt payments. DSCR loans have become increasingly popular among real estate investors because they qualify borrowers based on the property's income rather than personal income, making them ideal for self-employed investors or those with multiple properties. These loans typically require 20-25% down and carry slightly higher interest rates than conventional loans.

FormulaDSCR = Net Operating Income (NOI) / Annual Debt Service

Example

A rental property generates $36,000/year in NOI. Your annual mortgage payments (principal + interest) total $28,800. DSCR = $36,000 / $28,800 = 1.25. This exceeds the typical lender minimum of 1.20, so the property qualifies for a DSCR loan.

Depreciation

Depreciation is a tax deduction that allows real estate investors to deduct the cost of an income-producing property (excluding land value) over its useful life, as determined by the IRS. For residential rental properties, the IRS designates a useful life of 27.5 years; for commercial properties, it is 39 years. This means investors can deduct approximately 3.636% of the building's value each year from their taxable income, even if the property is actually appreciating in market value. Depreciation is often called a "phantom expense" because it reduces taxable income without requiring any actual cash outlay. According to the IRS, cost segregation studies can accelerate depreciation by reclassifying certain building components (carpeting, appliances, landscaping) into shorter 5, 7, or 15-year depreciation schedules, significantly increasing early-year deductions. When a depreciated property is sold, the IRS recaptures the depreciation at a 25% tax rate (Section 1250), though this can be deferred through a 1031 exchange.

FormulaAnnual Depreciation = (Property Value - Land Value) / 27.5 years (residential)

Example

You purchase a rental property for $275,000. The land is valued at $55,000, so the depreciable basis is $220,000. Annual depreciation deduction: $220,000 / 27.5 = $8,000. This $8,000 deduction reduces your taxable rental income each year.

Double Close

A double close (also called a simultaneous close or back-to-back closing) is a transaction strategy where a wholesaler or investor purchases a property from the seller and immediately resells it to an end buyer in two separate but consecutive closings, often on the same day. Unlike an assignment, the wholesaler actually takes title to the property -- even if only for minutes or hours. Double closings are used when the wholesaler wants to keep their profit margin private (since assignments disclose the fee on the settlement statement), when the spread between purchase and sale price is large, or when the original contract contains anti-assignment language. The wholesaler needs either their own funds or transactional funding (short-term same-day financing, typically at a flat fee of 1-2% of the purchase price) to complete the first closing. Not all title companies facilitate double closings, so investors should establish relationships with investor-friendly title companies in advance.

Example

You contract a distressed property at $100,000 and find a buyer at $140,000. Instead of assigning the contract (which would show the $40,000 spread), you close on the purchase with transactional funding at 10 AM, then close the sale to your buyer at 2 PM the same day, netting $40,000 minus funding fees.

Due Diligence

Due diligence is the investigation and analysis process an investor conducts after a property goes under contract but before closing. It is the buyer's opportunity to verify all assumptions, uncover potential problems, and confirm that the deal meets their investment criteria. A thorough due diligence process includes property inspection (structural, mechanical, electrical, plumbing, roof), title search (verifying clear ownership and no liens), review of zoning and land use restrictions, environmental assessments (if applicable), verification of rental income and expense history (for income properties), review of existing leases, survey verification, insurance quotes, and confirmation of rehab cost estimates. Most purchase contracts include a due diligence or inspection contingency period (typically 10-21 days) during which the buyer can cancel the contract and receive their earnest money back. Skipping or rushing due diligence is one of the most costly mistakes new investors make.

Example

During your 14-day due diligence period, a property inspection reveals the foundation needs $15,000 in repairs that were not visible during your initial walkthrough. You renegotiate the purchase price down by $15,000 or walk away with your earnest money intact.

Earnest Money Deposit (EMD)

An earnest money deposit (EMD) is a good-faith deposit a buyer places with a title company, escrow agent, or attorney when submitting a purchase contract. It demonstrates the buyer's serious intent to purchase the property and is applied toward the purchase price at closing. Typical EMD amounts range from 1-3% of the purchase price for traditional transactions, though wholesalers and investors often negotiate lower deposits ($500 to $2,000) on distressed or off-market deals. If the buyer completes the purchase, the EMD is credited toward their down payment or closing costs. If the buyer backs out within the terms of the contract's contingencies (inspection, financing, etc.), the EMD is typically refundable. If the buyer defaults (backs out without a valid contractual reason), the seller may be entitled to keep the EMD as liquidated damages. The EMD is held by a neutral third party -- never the seller directly -- until closing or contract termination.

Example

You submit an offer of $175,000 on an investment property with a $3,500 EMD (2%). The funds are held by the title company. After your inspection contingency passes and you close on the property, the $3,500 is applied to your closing costs.

Equity

Equity is the difference between a property's current market value and the outstanding balance of all liens (mortgages, loans) against it. Equity represents the owner's actual financial stake in the property. Equity increases through three mechanisms: paying down the mortgage principal over time, appreciation of the property's market value, and forced appreciation through renovations and improvements. Investors access equity through selling the property, cash-out refinancing, or home equity lines of credit (HELOCs). Equity is one of the most powerful wealth-building tools in real estate because it grows through both active (mortgage paydown, improvements) and passive (market appreciation) mechanisms simultaneously. For BRRRR investors, building equity quickly through forced appreciation is the key to recycling capital and scaling a portfolio. Negative equity (being "underwater") occurs when the mortgage balance exceeds the property's market value, a situation that affected millions of homeowners during the 2008 financial crisis.

Example

Your property is worth $300,000 and you owe $200,000 on the mortgage. Your equity is $100,000. If you do a cash-out refinance at 75% LTV ($225,000), you can pull out $25,000 in cash while retaining $75,000 in equity.

Fix and Flip

Fix and flip is a real estate investment strategy where an investor purchases a distressed or undervalued property, renovates it to increase its market value, and sells it for a profit within a short timeframe (typically 3-9 months). The strategy requires accurate estimation of three numbers: the After Repair Value (ARV), the rehab costs, and the purchase price that leaves enough margin for profit. According to ATTOM Data Solutions, 407,417 single-family homes and condos were flipped in the U.S. in 2023, representing 8.6% of all home sales. The average gross profit per flip was $66,000, though this figure does not account for holding costs, financing costs, and transaction costs, which typically reduce net profit to 10-15% of ARV. Successful flippers maintain strict discipline around the 70% Rule to ensure adequate profit margins. Common risks include underestimating rehab costs (the most frequent mistake), overestimating ARV, extended holding periods due to permitting delays or contractor issues, and market shifts during the renovation period.

Example

You buy a distressed 3-bed/2-bath for $150,000, invest $45,000 in renovation, and sell the finished product for $260,000. Gross profit: $65,000. After $12,000 in holding costs, $8,000 in financing costs, and $15,600 in selling costs (agent commissions), your net profit is approximately $29,400.

Forced Appreciation

Forced appreciation is the increase in a property's value that results from improvements made by the owner rather than from market conditions. Unlike natural appreciation (which is passive and market-dependent), forced appreciation is within the investor's control. Common forced appreciation strategies include renovating kitchens and bathrooms, adding square footage (bedroom additions, finishing basements), improving curb appeal, converting garages to ADUs (accessory dwelling units), adding bedrooms to increase the rent roll, reducing operating expenses (for multifamily), improving management efficiency, and raising below-market rents to market rate. Forced appreciation is the engine behind both fix-and-flip and BRRRR strategies. In multifamily investing, forced appreciation is even more powerful because property values are directly tied to NOI -- increasing income or reducing expenses by even small amounts can create significant value. For example, increasing NOI by $10,000 on a property in a 6% cap rate market increases the property value by approximately $166,667.

FormulaForced Appreciation = Post-Renovation Value - Pre-Renovation Value

Example

You buy a duplex generating $1,800/month in rent ($21,600/year NOI at 50% expense ratio). After a $30,000 renovation, you raise rents to $2,400/month ($28,800/year NOI). At a 7% cap rate, the property value increases from $154,286 to $205,714 -- a $51,428 increase from a $30,000 investment.

GRM (Gross Rent Multiplier)

The Gross Rent Multiplier (GRM) is a quick screening metric that compares a property's purchase price to its annual gross rental income. It tells you how many years of gross rent it would take to pay for the property at full price, before any expenses. A lower GRM indicates a potentially better income investment, while a higher GRM suggests the property is priced more expensively relative to its rental income. GRM is useful as a rapid comparison tool when evaluating multiple properties but has significant limitations: it ignores operating expenses, vacancy, financing costs, and property condition. For this reason, investors use GRM as a first-pass screening tool and then perform deeper analysis using cap rate, cash-on-cash return, and full cash flow projections on properties that pass the initial screen. Typical GRM values vary widely by market -- investor-friendly markets might show GRMs of 8-12, while expensive coastal markets can have GRMs of 20 or higher.

FormulaGRM = Property Price / Annual Gross Rental Income

Example

A fourplex is listed at $400,000 and generates $48,000/year in gross rent (4 units x $1,000/month). GRM = $400,000 / $48,000 = 8.33. Compared to a similar fourplex at $500,000 with the same income (GRM = 10.42), the first property offers a better rent-to-price ratio.

Hard Money Loan

A hard money loan is a short-term, asset-based loan provided by private lending companies rather than traditional banks. The loan is secured by the property itself (the "hard" asset), and qualification is based primarily on the deal's merits (LTV, ARV, potential profit) rather than the borrower's personal income or credit score. Hard money loans are the primary financing tool for fix-and-flip investors and are commonly used in BRRRR strategies for the initial purchase and rehab phase. Typical terms include 12-18 month durations, interest rates of 9-14%, 1-3 points (origination fees), and LTV limits of 65-75% of ARV or 80-90% of purchase price. Many hard money lenders also fund a portion (or all) of the rehab costs, disbursed in draws as work is completed. The speed of hard money is its biggest advantage -- closings can happen in 7-14 days versus 30-45 for conventional financing. The higher cost is offset by the opportunity to close deals that bank financing cannot accommodate.

Example

You find a deal with an ARV of $250,000 and a purchase price of $150,000. A hard money lender offers 90% of purchase ($135,000) plus 100% of rehab ($40,000) at 11% interest and 2 points. Your out-of-pocket cost is $15,000 down plus $3,500 in points.

Holding Costs

Holding costs (also called carrying costs) are the ongoing expenses an investor incurs for every month they own a property, from purchase to sale or stabilization. These costs accumulate whether or not the property is generating income, making them a critical factor in fix-and-flip profitability and overall project budgeting. Common holding costs include mortgage or hard money loan payments (interest), property taxes (prorated monthly), property insurance, utilities (electric, gas, water, sewer), HOA fees (if applicable), lawn care and property maintenance, and vacancy costs (for properties that will be rented). For fix-and-flip investors, holding costs typically range from $1,500 to $4,000 per month depending on the property and financing terms. Every month a rehab runs over schedule adds these costs directly to the total project cost, reducing profit. Experienced flippers budget holding costs for 2-3 months beyond their expected timeline as a safety margin.

Example

Monthly holding costs on a flip project: hard money interest ($1,200), property taxes ($350), insurance ($150), utilities ($200), lawn care ($100). Total: $2,000/month. If the rehab takes 5 months, holding costs total $10,000.

LTV (Loan-to-Value)

Loan-to-Value (LTV) ratio expresses the amount of a mortgage as a percentage of the property's appraised value or purchase price (whichever is lower). It is one of the most important metrics in real estate financing because it determines how much a lender is willing to lend, the interest rate offered, and whether private mortgage insurance (PMI) is required. A lower LTV means more equity and less risk for the lender, typically resulting in better loan terms. Conventional investment property loans typically max out at 75-80% LTV, meaning the investor must put 20-25% down. Hard money lenders often lend 65-75% of ARV or 80-90% of purchase price. For cash-out refinances used in BRRRR strategies, most lenders allow 70-75% LTV based on the new appraised value. According to the Mortgage Bankers Association, average LTV ratios for investment property loans in 2024 were approximately 67%, reflecting the more conservative lending standards applied to non-owner-occupied properties compared to primary residences.

FormulaLTV = Loan Amount / Property Value x 100

Example

You buy a property appraised at $200,000 and take out a $150,000 mortgage. LTV = $150,000 / $200,000 = 75%. You put $50,000 (25%) down. If you later do a cash-out refinance when the property is worth $280,000 at 75% LTV, your maximum loan amount is $210,000.

MAO (Maximum Allowable Offer)

Maximum Allowable Offer (MAO) is the highest price an investor should pay for a property while still maintaining an adequate profit margin. MAO is typically calculated using the 70% Rule (for fix-and-flip) or adjusted variations based on the investor's specific strategy and profit requirements. The MAO formula ensures that the purchase price accounts for rehab costs, holding costs, closing costs, and a target profit margin before any offer is submitted. Disciplined investors never exceed their MAO, regardless of emotional attachment to a deal or competitive pressure from other buyers. The MAO is only as accurate as the inputs -- particularly the ARV and rehab cost estimates -- which is why experienced investors use conservative estimates and verify comps thoroughly before calculating their offer. For wholesalers, the MAO is especially important because they must leave enough spread for their assignment fee while still offering a price that is attractive to end buyers.

FormulaMAO = (ARV x 70%) - Rehab Costs (standard 70% Rule version)

Example

A property has an ARV of $300,000 and needs $50,000 in rehab. MAO = ($300,000 x 0.70) - $50,000 = $210,000 - $50,000 = $160,000. You should offer no more than $160,000 to maintain a healthy profit margin.

NOI (Net Operating Income)

Net Operating Income (NOI) is the total income a property generates after all operating expenses are deducted, but before mortgage payments (debt service) and income taxes. NOI is the single most important metric in commercial and multifamily real estate because it is the numerator in the cap rate formula and the basis for property valuation. Operating expenses included in the NOI calculation are property taxes, insurance, property management fees, maintenance and repairs, utilities (if owner-paid), vacancy and credit loss reserves, and administrative costs. Expenses not included are mortgage payments, capital expenditures (CapEx), depreciation, and income taxes. A property's NOI is often expressed at a 50% expense ratio as a rule of thumb -- meaning operating expenses consume about 50% of gross rental income for residential properties -- though actual expense ratios can range from 35% to 60% depending on property type, age, and management efficiency. Increasing NOI through higher rents or lower expenses directly increases property value.

FormulaNOI = Gross Rental Income - Operating Expenses (excluding debt service)

Example

Gross rental income: $60,000/year. Operating expenses: property taxes ($6,000), insurance ($2,400), management ($4,800), maintenance ($3,600), vacancy reserve ($3,000), utilities ($2,400). Total expenses: $22,200. NOI = $60,000 - $22,200 = $37,800.

Private Money

Private money refers to loans from individual investors (friends, family, colleagues, high-net-worth acquaintances) rather than institutional lenders or hard money companies. Private money lending is one of the most flexible financing options in real estate investing because the terms are negotiated directly between the borrower and the private lender. There are no standardized interest rates, LTV requirements, or qualification criteria -- everything is based on the relationship and the deal's merits. Common private money structures include interest-only payments at 8-12% annually, profit-sharing arrangements, or equity participation. Private lenders are typically secured by a deed of trust or mortgage on the property, giving them a legal claim if the borrower defaults. The key advantage of private money is speed and flexibility -- loans can close in days, with no credit checks, income verification, or bureaucratic underwriting processes. Successful investors build a network of private lenders over time by consistently delivering returns and maintaining transparent communication about their deals.

Example

Your uncle lends you $120,000 to purchase and renovate a flip property. You agree to 10% annualized interest, interest-only payments monthly, with the principal repaid when the property sells (estimated 6 months). His return: $6,000 in interest. Your benefit: no hard money points and flexible terms.

Proof of Funds

Proof of funds (POF) is documentation that demonstrates a buyer has the financial capacity to complete a real estate purchase. Sellers and their agents commonly request proof of funds before accepting an offer, especially on cash deals or when the buyer is an investor. Acceptable proof of funds includes bank statements showing sufficient liquid funds, a letter from a financial institution confirming available balances, a hard money or private lender pre-approval letter, or a line of credit statement. For cash buyers, proof of funds is typically a recent bank statement (within 30 days) showing a balance equal to or exceeding the purchase price. For financed purchases, a pre-approval letter from the lender serves a similar purpose. Many hard money lenders provide proof of funds letters to their borrowers at no cost, even before a specific deal is identified, enabling investors to submit credible offers quickly. In competitive markets, having proof of funds ready to submit with your offer can be the difference between winning and losing a deal.

Example

You find a bank-owned property listed at $135,000. The listing requires proof of funds with all offers. You submit a recent bank statement showing $150,000 in your investment account, along with your offer. The bank accepts your offer over a competing financed buyer because your cash POF signals a faster, more certain closing.

Return on Investment (ROI)

Return on Investment (ROI) is a performance metric that measures the profitability of an investment as a percentage of the total amount invested. In real estate, ROI is used to evaluate and compare the financial performance of different properties, strategies, and deals. Unlike cash-on-cash return (which only measures annual cash flow), a comprehensive ROI calculation accounts for all sources of return: cash flow, appreciation, mortgage paydown, tax benefits, and any forced appreciation created through renovation. ROI can be calculated for a single year (annualized ROI) or for the entire hold period (total ROI). According to the National Council of Real Estate Investment Fiduciaries (NCREIF), the average annual total return for private commercial real estate in the U.S. has been approximately 9.4% over the past 25 years. For individual investors, actual ROI varies significantly based on purchase price, financing, market conditions, and execution quality. Investors should calculate ROI both with and without leverage (financing) to understand the impact of debt on their returns.

FormulaROI = (Total Gain from Investment - Cost of Investment) / Cost of Investment x 100

Example

You invest $60,000 total (down payment, closing costs, rehab) into a rental property. Over 3 years, you earn $14,400 in cash flow, $9,000 in mortgage paydown, and $18,000 in appreciation. Total gain: $41,400. ROI = $41,400 / $60,000 = 69% total, or 23% annualized.

Scope of Work

A scope of work (SOW) is a detailed written document that outlines every renovation task, material specification, and expected cost for a rehab project. The SOW is the blueprint for the entire renovation -- it tells contractors exactly what work needs to be done, what materials to use, and what the expected cost is for each line item. A comprehensive SOW includes a room-by-room breakdown of work, material specifications (e.g., "LVP flooring, $3/sq ft installed" vs. simply "new flooring"), labor estimates, a timeline for each phase, and a contingency budget (typically 10-15% of total rehab costs). Creating an accurate SOW before making an offer is essential because rehab costs directly impact your MAO and project profitability. Experienced investors use standardized SOW templates and walk properties with contractors to get detailed bids before finalizing purchase offers. The SOW also serves as the contractual basis for paying contractors and resolving disputes about the quality or completeness of work.

Example

SOW for a 1,200 sq ft flip: Kitchen gut reno ($18,000), 2 bathroom updates ($8,000), LVP flooring throughout ($5,400), interior paint ($3,600), electrical panel upgrade ($2,500), HVAC replacement ($6,000), landscaping ($2,000), contingency 10% ($4,550). Total: $50,050.

Seller Financing

Seller financing (also called owner financing) is a transaction structure where the property seller acts as the lender, allowing the buyer to make payments directly to them instead of obtaining a traditional mortgage. The seller retains a lien on the property (via a promissory note and deed of trust) until the buyer pays off the agreed-upon balance. Seller financing is particularly useful when the buyer cannot qualify for conventional financing, when the property itself is not financeable (due to condition or type), or when both parties benefit from creative terms such as low or no down payment, below-market interest rates, balloon payments, or interest-only periods. Common structures include a land contract (contract for deed), where the seller retains legal title until the balance is paid, and a traditional note and mortgage, where the buyer receives title immediately but the seller holds a lien. Seller financing can also be combined with other strategies -- for example, a buyer might get seller financing for a portion of the purchase price and use a conventional loan or cash for the remainder.

Example

A retired owner has a free-and-clear property worth $200,000. Instead of selling conventionally, they agree to seller financing: $20,000 down (10%), $180,000 note at 6% interest, 30-year amortization with a 5-year balloon. Monthly payment: $1,079. The seller earns interest income; the buyer avoids bank qualification.

Subject-To

Subject-to (or "sub-to") is a creative financing strategy where the buyer purchases a property "subject to" the existing mortgage remaining in place. The deed transfers to the buyer, but the seller's original mortgage stays on the property and the buyer makes the monthly payments. The seller's name remains on the loan, but the buyer owns the property. Subject-to is most commonly used when the seller has a favorable interest rate that would be lost through a conventional sale, when the seller is motivated (facing foreclosure, relocation, divorce), or when the buyer wants to acquire property with little to no money down. The primary risk is the due-on-sale clause -- a provision in most mortgages that gives the lender the right to call the full loan balance due if ownership transfers. In practice, lenders rarely enforce this clause as long as payments are being made on time, but the risk exists. Subject-to deals require careful legal structuring, typically involving a real estate attorney, and transparent communication with the seller about the risks and benefits.

Example

A motivated seller owes $160,000 on a property worth $210,000 with a 3.5% interest rate. You take the property subject-to the existing mortgage, paying the seller $5,000 for their remaining equity position. Your monthly payment is $720 (the existing mortgage payment). You rent the property for $1,500/month, cash flowing $780/month before expenses.

Wholesale / Assignment

Wholesaling (also called assignment of contract) is a real estate investment strategy where an investor finds a property at a below-market price, puts it under contract, and then assigns that contract to an end buyer for a fee -- without ever purchasing or renovating the property. The wholesaler profits from the assignment fee (the spread between their contract price and the end buyer's purchase price). Wholesaling requires minimal capital -- typically just the earnest money deposit -- and no credit qualifications, making it one of the most accessible entry points into real estate investing. The process involves finding motivated sellers (through direct mail, driving for dollars, cold calling, or online marketing), negotiating a purchase price below market value, putting the property under contract with an "and/or assigns" clause, marketing the deal to a network of cash buyers, and assigning the contract for a fee at closing. According to BiggerPockets, the average wholesale deal takes 30-90 days from contract to assignment and generates $5,000-$20,000 in assignment fees for residential properties.

Example

You negotiate a purchase contract with a motivated seller at $110,000 for a property with an ARV of $200,000 needing $40,000 in rehab. Using the 70% rule, end buyers would pay up to $100,000, but this deal has extra margin. You assign the contract to a flipper for $125,000, earning a $15,000 assignment fee.

Put These Concepts to Work

PropLab calculates ARV, MAO, cap rate, cash-on-cash return, DSCR, and more -- automatically. Analyze any deal in 60 seconds.

3 free analyses, no credit card required