Real Estate Investing Glossary: Scouq

Numbers

1031 Exchange

A tax-deferral strategy that lets you sell one investment property and reinvest the proceeds into another without paying capital gains tax at the time of sale.

Named for IRS Section 1031, the exchange requires you to identify a replacement property within 45 days and close within 180 days. The tax is deferred, not forgiven: you will owe it when you eventually sell without doing another exchange. Strict rules apply: both properties must be held for business or investment purposes, and a qualified intermediary must hold the funds between transactions.

Example: You sell a rental house for $400,000, realizing $150,000 in gains. By doing a 1031 exchange into a $500,000 apartment building, you defer the capital gains tax and deploy the full $400,000 as equity.

1% Rule

A rule of thumb that says monthly rent should equal at least 1% of the purchase price for a property to generate positive cash flow.

This is a screening filter, not a guarantee. A $200,000 property should rent for at least $2,000 per month by this rule. It does not account for actual expenses, financing, or local market conditions; markets with high prices and low rents (many coastal cities) rarely hit 1%, while affordable Midwest markets frequently exceed it. Use it to quickly discard deals that obviously won't pencil, then run real numbers on the ones that pass.

Example: A duplex listed at $180,000 renting for $1,600/mo total passes the 1% screen ($1,600 / $180,000 = 0.89%, close but not quite). At $160,000 it passes cleanly.

50% Rule

A rule of thumb that says operating expenses (excluding mortgage payments) will consume roughly half of gross rents on a typical rental property.

The 50% accounts for taxes, insurance, maintenance, management, vacancy, and capital reserves. It is deliberately conservative and works best as a quick sanity check on residential rentals. Newer properties in low-tax states often beat it; older buildings or those with high tax bills often miss it. Always verify with real numbers before purchasing.

Example: A fourplex grosses $4,000/mo. The 50% rule estimates $2,000 in monthly expenses. If your mortgage payment is $1,500, estimated cash flow is $500/mo, before you've actually looked at taxes or repair history.

70% Rule

A rule of thumb used by fix-and-flip investors to cap the maximum purchase price at 70% of ARV minus estimated repair costs.

Formula: Max offer = (ARV x 0.70) - Repair costs. The 30% margin is meant to cover holding costs, closing costs, real estate commissions, and profit. In competitive markets some investors use 75% or even 80%, which compresses their margin. In softer markets or with large rehabs, staying at 65% or below is wise. This is a starting filter, not a substitute for a full cost analysis.

Example: ARV is $300,000, repairs are $40,000. Max offer = ($300,000 x 0.70) - $40,000 = $210,000 - $40,000 = $170,000.

A

ADU (Accessory Dwelling Unit)

A secondary housing unit on the same lot as a primary residence; commonly a garage conversion, basement apartment, or backyard cottage.

ADUs have become a popular value-add strategy because they add rentable square footage without purchasing a separate property. Many states and cities have passed laws making it easier to build ADUs, reducing zoning barriers that used to block them. Lenders often count projected ADU rent in underwriting, which can improve your debt-service coverage ratio.

Example: A single-family home purchased for $350,000 has a detached garage. Converting it to a one-bedroom ADU for $60,000 adds $1,200/mo in rent, improving cash flow and increasing the property's value to buyers who want rental income.

Amortization

The process of paying off a loan through scheduled payments, each covering both interest and a portion of the principal balance.

Early in a loan's life the majority of each payment goes toward interest; later payments are mostly principal. On a standard 30-year fixed mortgage at 7%, you pay more interest than principal for roughly the first 20 years. Understanding your amortization schedule helps you see how much equity you are actually building versus how much you are paying the bank.

Example: A $200,000 mortgage at 7% over 30 years has a monthly payment of about $1,331. In month one, roughly $1,167 is interest and only $164 reduces the principal.

Appreciation

The increase in a property's market value over time, either through natural market growth or through improvements made to the property.

There are two types: natural (or market) appreciation, driven by supply and demand in a given area, and forced appreciation, which you create by improving the property or increasing its income. Investors who rely solely on natural appreciation are speculating. Investors who force appreciation through value-add strategies have more control over their returns. Long-term, US residential real estate has appreciated at roughly 3-4% per year on average nationally, though individual markets vary widely.

ARV (After-Repair Value)

The estimated market value of a property after all planned renovations are completed.

ARV is the foundation of fix-and-flip underwriting. You derive it by studying comparable sales (comps) of renovated homes nearby. The ARV is only as reliable as the comps supporting it: use recent sales (within 90 days), similar size and condition, and the same neighborhood. Overestimating ARV is one of the most common and costly mistakes new flippers make.

Example: Three renovated 3-bed/2-bath homes in the same zip code sold for $295,000, $310,000, and $305,000 in the past 60 days. A reasonable ARV for a similar property might be $300,000-$305,000.

B

BRRRR (Buy, Rehab, Rent, Refinance, Repeat)

A strategy where an investor buys a distressed property, renovates it, rents it out, then refinances based on the new higher value to pull out capital for the next deal.

The goal is to recycle capital: ideally pulling out close to what you put in so the next deal is largely funded by the equity you created. A successful BRRRR requires buying well below ARV, accurate rehab budgets, and a property that appraises at or near your projected value after repairs. Refinance timing matters: most lenders require a 6-12 month seasoning period before a cash-out refinance.

Example: Buy a distressed house for $120,000, spend $40,000 on rehab. It now appraises at $220,000. A 75% LTV cash-out refinance gives you $165,000, covering your $160,000 all-in cost and leaving a cash-flowing rental with very little capital tied up.

C

Cap Rate (Capitalization Rate)

The ratio of a property's net operating income to its purchase price, expressed as a percentage. Used to compare properties regardless of financing.

Formula: Cap rate = NOI / Purchase price. A 6% cap rate on a $300,000 property means $18,000 in annual NOI. Cap rates are market-driven: in expensive coastal cities, 3-4% caps are common; in smaller Midwest markets, 7-10% is achievable. A higher cap rate generally signals higher yield but also higher perceived risk or less growth potential. Cap rate does not account for your loan terms, which is why cash-on-cash return is also important.

Example: A duplex generates $24,000/yr in gross rents. After $9,600 in expenses (40%), NOI is $14,400. If you buy it for $200,000, cap rate = $14,400 / $200,000 = 7.2%.

Cash Flow

The money left over each month after collecting rent and paying all expenses, including the mortgage payment.

Positive cash flow means the property puts money in your pocket. Negative cash flow (sometimes called "alligator" investing) means you are subsidizing the property out of pocket each month, betting on future appreciation. For buy-and-hold investors, cash flow is the primary metric of financial health. Even small per-door cash flow adds up across a portfolio and provides a buffer for unexpected vacancies or repairs.

Example: Rent $1,800. Expenses (mortgage, taxes, insurance, management, reserves) $1,550. Monthly cash flow = $250, or $3,000/yr.

See also: NOI, 50% Rule, Deal calculator

Cash-on-Cash Return

Annual pre-tax cash flow divided by total cash invested, expressed as a percentage. Measures actual return on your out-of-pocket investment.

Unlike cap rate, cash-on-cash accounts for your specific financing. Two investors buying the same property with different down payments or loan terms will have different cash-on-cash returns. A common benchmark for buy-and-hold investors is 8-12% cash-on-cash, though targets vary by market and risk tolerance.

Example: You put $50,000 down and pay $5,000 in closing costs on a rental. Annual cash flow is $6,000. Cash-on-cash = $6,000 / $55,000 = 10.9%.

Comps (Comparable Sales)

Recently sold properties similar to the one you are evaluating, used to estimate market value.

Good comps are close in location (ideally the same neighborhood or subdivision), similar in size (within 10-20% of square footage), similar in age and condition, and sold recently (within 90 days, though 6 months is acceptable in slow markets). Comps are the backbone of every appraisal and every ARV calculation. Adjustments are made for differences in beds, baths, garage, updates, and lot size.

D

DSCR (Debt-Service Coverage Ratio)

The ratio of a property's annual NOI to its annual mortgage payments. Used by lenders to evaluate whether the property generates enough income to cover its debt.

Formula: DSCR = Annual NOI / Annual debt service. A DSCR above 1.0 means the property covers its own payments. Most conventional lenders want a DSCR of 1.20 or higher on investment properties. A DSCR of 1.25 means income is 25% higher than the loan payment, providing a cushion for vacancies and expenses.

Example: NOI is $18,000/yr. Annual mortgage payments are $14,400. DSCR = $18,000 / $14,400 = 1.25. The lender will likely approve this loan.

DSCR Loan

A mortgage product for investment properties where qualification is based on the property's income rather than the borrower's personal income.

DSCR loans are popular with self-employed investors and those with multiple properties. Lenders underwrite based on whether the rent covers the payment (typically requiring a DSCR of 1.0 or higher). Rates are usually higher than conventional investment loans, but approval is faster and less document-heavy. They are available for single-family, small multifamily, and sometimes short-term rentals.

Down Payment

The portion of the purchase price paid upfront in cash, with the remainder financed through a mortgage.

Investment property loans typically require 15-25% down compared to 3-20% for owner-occupied homes. The size of your down payment directly affects your LTV, mortgage rate, PMI requirement, and monthly cash flow. Larger down payments lower monthly payments and improve cash flow but reduce your ability to spread capital across more deals.

Example: A $250,000 property with 20% down ($50,000) leaves a $200,000 mortgage. At 20% down you typically avoid PMI on conventional loans.

E

Earnest Money

A deposit paid by the buyer when a purchase contract is signed, demonstrating serious intent to complete the transaction.

Earnest money is typically 1-3% of the purchase price in residential deals, though investors sometimes offer more to strengthen competitive offers. If the deal closes, earnest money applies toward the down payment or closing costs. If the buyer backs out without a valid contract contingency (inspection, financing, appraisal), the seller may keep the deposit. Protect your earnest money by understanding your contingencies before waiving them.

Escrow

A neutral third-party account or service that holds funds or documents until all conditions of a transaction are met.

In real estate, escrow serves two purposes. During the purchase process, an escrow agent holds earnest money and manages the closing. During ownership, your lender may hold a monthly escrow reserve to pay property taxes and insurance on your behalf. Escrow protects both parties by ensuring funds are only released when contractual obligations are fulfilled.

F

FHA Loan

A government-backed mortgage insured by the Federal Housing Administration, allowing lower down payments (as low as 3.5%) for owner-occupants.

Investors use FHA loans primarily through house hacking: buying a 2-4 unit property, living in one unit, and renting the others. The owner-occupancy requirement means you must move in within 60 days of closing. FHA loans require mortgage insurance premiums (MIP) for the life of the loan if you put down less than 10%. The low down payment and lenient credit requirements make FHA a common entry point for new investors with limited capital.

Fix and Flip

A short-term investment strategy where an investor buys a distressed property, renovates it, and sells it for a profit within months.

Profit comes from the spread between all-in cost (purchase + rehab + holding costs) and the sale price. Flipping requires accurate ARV estimates, disciplined rehab budgets, and efficient timelines. Every month of holding costs (interest, taxes, insurance, utilities) eats into profit. Flipping is active income, not passive. Most experienced flippers target a minimum net profit of 15-20% of ARV or a fixed dollar amount per project.

G

Gross Rent Multiplier (GRM)

Purchase price divided by annual gross rents. A quick screening metric for income-producing properties.

Formula: GRM = Purchase price / Annual gross rents. Lower GRM means more rent per dollar spent. GRM ignores expenses and vacancy, so it is a rough filter rather than a full analysis. In strong rental markets, GRMs of 10-15 are common; in weaker markets, 6-9. GRM is most useful when comparing similar properties in the same market where expenses are roughly equal.

Example: A triplex sells for $300,000 and collects $30,000/yr in rents. GRM = 10. A similar property at $270,000 with the same rents has a GRM of 9 and is the better deal by this metric alone.

H

Hard Money Loan

A short-term loan from a private lender, secured by the property itself, with higher interest rates and fees than conventional mortgages.

Hard money lenders care primarily about the collateral (the property's value and ARV) rather than the borrower's credit score or income. Rates typically range from 9-14%, with 1-4 points upfront, and terms of 6-18 months. Hard money is the go-to financing for fix-and-flip projects and for acquisitions that need to close fast. The high cost of capital makes speed of execution critical: every extra month of holding compounds the cost.

HELOC (Home Equity Line of Credit)

A revolving line of credit secured by the equity in a property, allowing you to borrow up to a set limit as needed.

HELOCs are commonly used by investors to fund down payments, rehab costs, or bridge gaps between deals. They typically have variable interest rates tied to prime. The draw period (usually 10 years) lets you borrow and repay freely; after that, a repayment period begins. Using a HELOC on your primary residence to invest carries risk: if the investment goes sideways you are putting your home on the line.

HOA (Homeowners Association)

An organization in a planned community that enforces rules and collects fees from property owners to maintain shared spaces and amenities.

HOA fees are an operating expense that directly reduces cash flow. They can range from $50/mo for a basic condo to $1,000+/mo for luxury properties. Some HOAs restrict or prohibit short-term rentals, which matters if you are evaluating an Airbnb strategy. Before purchasing in an HOA, review the financials, meeting minutes, reserve fund balance, and any pending special assessments. Underfunded reserves often lead to large one-time charges.

Example: A condo with $400/mo HOA fees effectively has $4,800/yr in fixed operating costs regardless of vacancy, before you factor in taxes, insurance, or mortgage.

House Hack

Buying a property, living in part of it, and renting out the remaining units or rooms to offset or eliminate your housing costs.

House hacking is one of the most accessible entry points into real estate investing because it allows owner-occupied financing (lower down payments, better rates) on an income-producing property. Common formats include 2-4 unit multifamily, renting spare rooms in a single-family home, or renting an ADU. When tenants pay your mortgage, you build equity at low or no personal cost while learning the landlord business with training wheels on.

I

IRR (Internal Rate of Return)

The annualized rate of return that makes the net present value of all cash flows from an investment equal to zero, accounting for the time value of money.

IRR is more sophisticated than cash-on-cash return because it weights cash flows by when they occur. It is most useful when comparing investments with different holding periods or cash flow profiles. A 15% IRR over 5 years is generally better than a 10% IRR over the same period. IRR is harder to compute by hand but most deal analysis spreadsheets and tools calculate it automatically.

L

LTV (Loan-to-Value)

The loan amount as a percentage of the property's appraised value. Used by lenders to assess risk.

Formula: LTV = Loan amount / Appraised value. An 80% LTV means you borrowed 80% of the property's value and own the remaining 20% as equity. Lower LTV means less lender risk and typically better rates. Lenders usually cap investment property loans at 75-80% LTV. When LTV exceeds 80% on conventional loans, PMI is typically required.

Example: Property appraised at $250,000. You borrow $187,500. LTV = $187,500 / $250,000 = 75%.

M

Market Rent

The rent a property would likely command on the open market in its current condition, based on comparable rentals in the same area.

Market rent is what you use to underwrite a deal. If a unit is currently occupied at below-market rent, the "upside" is the gap between current and market rents. Long-term tenants often pay below market. Knowing market rent requires researching active listings and recent lease signings in the same neighborhood and property class.

MLS (Multiple Listing Service)

A shared database used by real estate agents to list properties for sale and access information on other listed properties.

The MLS is the primary source of on-market deal data. Access is typically limited to licensed agents and their clients. Investors work with buyer's agents or obtain their own licenses to access MLS data directly. Off-market deals (wholesalers, direct mail, driving for dollars) bypass the MLS entirely and can offer less competition, though they require more sourcing effort.

N

NOI (Net Operating Income)

Annual gross rent minus all operating expenses, before mortgage payments and income taxes.

Formula: NOI = Gross rents - (Vacancy + Operating expenses). NOI excludes debt service, depreciation, and capital expenditures. It is the purest measure of a property's income-generating ability, independent of how it is financed. Cap rates and DSCR calculations are both built on NOI. Inflated NOI projections (overstating rents, understating expenses) are the most common source of bad investment decisions.

Example: Gross rents $36,000/yr. Vacancy (5%) $1,800. Operating expenses $12,000 (taxes, insurance, maintenance, management). NOI = $36,000 - $1,800 - $12,000 = $22,200.

See also: Cap rate, DSCR, Deal calculator

P

PITI (Principal, Interest, Taxes, Insurance)

The four components of a typical monthly mortgage payment: principal repayment, interest charges, property taxes, and property insurance.

PITI is the true monthly cost of carrying a mortgage. Lenders use PITI (plus HOA fees and PMI if applicable) to calculate your debt-to-income ratio. When underwriting a rental, PITI is one of the largest expense line items. Some investors break out taxes and insurance separately; others bundle them together; either way, all four must be accounted for.

PMI (Private Mortgage Insurance)

Insurance required by conventional lenders when a borrower's LTV exceeds 80%, protecting the lender (not the borrower) in case of default.

PMI typically costs 0.5-1.5% of the loan amount per year, added to your monthly payment. It can be canceled once your LTV drops to 80% through appreciation or paydown. For investment properties, PMI is an avoidable cost if you can bring at least 20% down. FHA loans have their own version called MIP (mortgage insurance premium), which can last the life of the loan if you put down less than 10%.

Pre-Approval

A lender's written estimate of how much you can borrow, based on a review of your credit, income, assets, and debts.

Pre-approval is stronger than pre-qualification (which is just a verbal estimate). Sellers and their agents take offers with pre-approval letters more seriously. For investors, pre-approval helps set realistic acquisition budgets and speeds up the offer process. Note that pre-approval for investment properties often requires 2 years of tax returns, current leases on other rentals, and a higher credit score than owner-occupied loans.

Property Management

The day-to-day operation of a rental property, including tenant screening, rent collection, maintenance coordination, and lease enforcement.

Professional property managers typically charge 8-12% of monthly rents plus leasing fees (half to one month's rent when placing a new tenant). Self-managing saves money but costs time. Investors with out-of-state properties or large portfolios almost always use professional management. When underwriting a deal, always include property management as an expense even if you plan to self-manage: it keeps your numbers honest and makes the property more saleable later.

Example: A property grossing $2,000/mo with a 10% management fee costs $200/mo in management, or $2,400/yr, whether you hire a manager or absorb the labor yourself.

R

REI (Real Estate Investor)

A person who buys, holds, or develops real property with the intent to generate financial returns.

REI is shorthand for the asset class and the community around it. Strategies range from passive (buying REITs) to highly active (flipping, development). Most individual investors start with single-family rentals and expand to small multifamily properties. The term is broad and carries no formal definition: a first-time house hacker is an REI just as much as a 500-unit apartment owner.

REIT (Real Estate Investment Trust)

A company that owns income-producing real estate and is required to distribute at least 90% of taxable income to shareholders as dividends.

Publicly traded REITs let you invest in real estate like a stock, with instant liquidity. They provide diversification across property types (residential, commercial, industrial, data centers) without direct ownership. However, REITs do not offer the leverage, tax benefits (depreciation), or control of direct ownership. They are better suited to passive investors who want real estate exposure without landlord responsibilities.

Rehab

Renovation work done on a property to improve its condition, functionality, or value.

Rehabs range from light cosmetic work (paint, flooring, fixtures) to full structural gut renovations. Accurately scoping and budgeting a rehab is one of the hardest skills in investing. Underbidding rehab costs is a common cause of failed flips. A solid rehab budget includes a contingency (10-20% of estimated costs) for surprises, permits, and delays. The key question is always whether the cost of the rehab will be reflected in a corresponding increase in value or rent.

Rent-to-Price Ratio

Monthly rent divided by purchase price, expressed as a percentage. Used to quickly assess a rental property's income potential relative to its cost.

This is the math behind the 1% rule. A 1% ratio means monthly rent equals 1% of price. Higher ratios are generally more favorable for cash flow. The metric does not account for expenses or financing, but it is useful for quickly sorting listings. Markets with high home prices tend to have lower ratios; affordable markets trend higher.

Example: Home price $150,000, rent $1,800/mo. Ratio = $1,800 / $150,000 = 1.2%. This exceeds the 1% rule and warrants a deeper look.

S

Section 8

A federal rental assistance program (officially the Housing Choice Voucher Program) where the government pays a portion of an eligible tenant's rent directly to the landlord.

Section 8 vouchers reduce vacancy risk because the government portion of rent is guaranteed. Landlords must pass a Housing Quality Standards inspection and keep the property in code. Rents are capped at local fair market rents set by HUD. Landlords participate voluntarily in most states, though some jurisdictions have source-of-income protection laws that limit your ability to decline voucher holders.

Seller Financing

An arrangement where the seller acts as the lender, allowing the buyer to make payments directly to them rather than obtaining a traditional mortgage.

Seller financing is useful when a buyer cannot qualify for conventional financing or when both parties want to move faster than a bank. Terms are negotiable: interest rate, down payment, amortization period, and balloon payment. For sellers, it creates an income stream and can defer capital gains by spreading the sale across multiple years (installment sale treatment). For buyers, it can mean lower closing costs and more flexible underwriting.

Short-Term Rental (STR)

A property rented out for periods of less than 30 days, typically through platforms like Airbnb or Vrbo.

STRs can generate significantly more revenue than long-term rentals in tourist-heavy or high-demand markets, but they require more active management (turnover cleaning, guest communication, dynamic pricing). Regulatory risk is real: many cities have restricted or banned STRs, and rules change. HOAs may also prohibit them. STR income is also less stable than long-term rent, fluctuating by season and local events.

T

Title Insurance

A one-time insurance policy that protects against legal claims arising from defects in a property's title, such as liens, ownership disputes, or recording errors.

There are two policies: the lender's policy (required by almost all lenders) and the owner's policy (optional but strongly recommended). Title insurance protects you if, after closing, someone else claims ownership, a prior lien surfaces, or a fraudulent deed is discovered. Unlike other insurance, it covers events that happened before you bought the property, not future events. Cost is typically 0.5-1% of the purchase price, paid once at closing.

Turnkey Property

A rental property that is fully renovated, tenanted, and managed: ready to generate income immediately after purchase with little or no work by the buyer.

Turnkey properties are marketed to passive investors who want to own real estate without dealing with renovations or management. The convenience premium is real: you typically pay closer to retail and have less room for forced appreciation. The risk is that you are trusting the seller's numbers on rent, expenses, and rehab quality. Independent inspections, rent verification, and expense audits are essential before closing on a turnkey deal.

U

Underwriting

The process of analyzing a property or loan to determine its financial viability, risk level, and appropriate terms.

When lenders underwrite a loan, they verify the borrower's creditworthiness and the property's value. When investors underwrite a deal, they model projected income, expenses, cash flow, and returns under different scenarios. Good underwriting is conservative: use actual current rents (not hoped-for rents), realistic vacancy rates (5-10% minimum), and a full expense load. Garbage-in underwriting leads to unprofitable deals.

V

VA Loan

A government-backed mortgage available to eligible veterans, active-duty service members, and surviving spouses, offering zero down payment and no PMI.

VA loans are one of the best financing tools available to those who qualify. No down payment, no PMI, and competitive rates make it possible to house hack a 2-4 unit property with minimal cash out of pocket. The owner-occupancy requirement means you must live in one unit. The VA funding fee (1.4-3.6% of the loan amount, waived for some disabled veterans) is the primary cost. Eligible investors often use VA financing for their first or second property before moving to conventional investment loans.

Vacancy Rate

The percentage of time a rental unit sits empty and generates no income, expressed annually.

A 5% vacancy rate means the property is vacant an average of 18 days per year. Vacancy should always be included in your underwriting: even high-demand markets have turnover. Market vacancy rates (published by local apartment associations and census data) are a useful starting point, but individual property history matters more. Properties with high turnover, difficult layouts, or deferred maintenance often have above-average vacancy.

Example: A unit rents for $1,500/mo. At 5% vacancy, effective annual income is $1,500 x 12 x 0.95 = $17,100, not the $18,000 gross figure.

W

Wholesaling

A strategy where an investor contracts to purchase a property below market value and then assigns that contract to another buyer for a fee, without ever closing on the property themselves.

Wholesalers profit from the spread between their contract price and what another investor will pay. It requires finding distressed sellers willing to sell below market, and a network of buyers ready to close. Wholesaling is often marketed as a no-money-down strategy, but it requires significant marketing spend, negotiation skill, and a reliable buyer list. Regulations around wholesaling vary by state, and unlicensed assignment of contracts can create legal exposure in some jurisdictions.

Example: A wholesaler gets a distressed home under contract at $140,000 and assigns it to a flipper for $155,000. The wholesaler keeps the $15,000 assignment fee without ever buying the property.