Glossary of Frequently Used Terms in Real Estate Investing

This is not a complete list. We just add to it when we catch ourselves using jargon.

ARV
After repair value. The expected value of a property after rehabilitation. This term is more commonly used in single family house flipping but can apply to multifamily as well.
CapEx (capital expenditure)
CapEx refers to investment in fixes or improvements that have a time horizon of more than one year. For example, building a new tennis court or retrofitting the electrical system both have useful lives of 10+ years. CapEx epsnsi
Cap rate
A simple percentage metric of how a property is valued. It consists of dividing the most recent 12 month period of net income (sometimes called the T-12) by the purchase price. This will give you a percentage number of usually 5-15%, but when talking about cap rates, industry professionals will leave out the percent and just say “five cap” instead of 5%. A property with a lower cap rate is more expensive than one with a higher cap rate. BlueSpruce looks for 8-cap or higher properties, but those are hard to find. In a major high-growth city 5- and 6-caps are more common.
Cash on cash return (COC)
Percentage return on an investor receives from the cash in the deal, usually expressed as an annual number. For example, suppose an investor buys a property for $1 million using a $200,000 down payment (“cash in”) and $800,000 loan. Also suppose that the property produces $24,000 in cash flow (“cash out”) after expenses and debt service. Divide $24,000 by $200,000 to get .12. This is a 12% COC.
Letter of Intent (LOI)
A non-binding letter spelling out the offer and terms of purchase for a property. If accepted, the seller signs the LOI and begins drafting a purchase and sale contract. Click here to download an example LOI.
MSA
Metropolitan statistical area, an aggregation of demographics and other indicators gathered by the US Census Bureau
Net Operating Income (NOI)
The net income for the property after property taxes, insurance, maintenance and other operating expenses. It does not include debt service or CapEx and therefore is not equivalent to cash flow.
Preferred return
The threshold return that investors must receive before the general partner receives compensation. In the case that the preferred return is not met, it usually accrues and must be repaid in the future. For example, if there is a 7% preferred return, but the project only returns 6% to investors in the first year, then in the following year the investors are entitled to 8%.

Private placement memorandum (PPM)
A private placement memorandum is a legal document used in syndications. Investors in a syndication typically have very little operational control, but receive cash distributions (dividends) on a regular basis, usually quarterly. The private placement memorandum spells out how returns are calculated, the rights of the investor, and the obligations of the management. The private placement memorandum is informational. In order to invest, an investor must fill out a subscription agreement.
Check out our video about private placements, which explains all the pieces to the puzzle.
A sponsor is one more more people, or often a company, that puts their name(s) on the loan. Lenders require sponsors to have sufficient net worth and liquidity in the unlikely event that the property cannot cover the debt payments.
Subscription agreement
If an investor decides to invest in a syndication, s/he fills out a subscription agreement (sometimes called a “booklet”) that contains information such as how much money the investor is putting into the deal, the investor’s name, contact information, and whether the investor is accredited.
Syndication
A syndication is a group of investors who are collectively buying a property. Typically there is a Manager or General Partner (depending on the entity) who makes all decisions about the property and handles the administrative overhead. Investors receive passive income from the property and typically have very little input to management decisions.
T-12
The trailing 12 months of profit and loss statements, broken out by month. Lenders require this as well at least two years of annualized operating history. Some sellers and brokers will not provide this until the property is under contract, but at a bare minimum they should provide a T-3 before you send a letter of intent.
Wholesaler
A wholesaler is similar to a real estate agent in that they find properties for sale. However, instead of listing the property for sale, they put the property under contract themselves, then turn around and find a new buyer before the contract closes. They are compensated through an assignment fee paid at closing.