1031 Exchange – In order to avoid capital gains taxes, you can roll over your profit into your next deal.
After Repair Value – The estimated value of a fix & flip property after it’s been repaired. This is what you believe the house is going to sell for at the end. Estimating this value accurately before getting into the deal is one of the most important factors of fix & flip success.
Amortization – This is the process of spreading out the loan into fixed payments. When you buy a house with a 30-year traditional loan, you’re given an amortization schedule that shows how much of each payment goes towards your principal and how much goes towards interest. As a real estate investor, it’s imperative that you find deals with equity. Often you can make rough estimates by using an amortization calculator (like this one). You can Google what the average interest rates were the year the house was purchased, and use that to estimate how much equity the owner has in the house.
Appraisal – This is a third party professional who assesses the value of the property, based on its comparable properties and its condition. This is most relevant in the investment world when you’re ready to sell your finished rehab on the MLS. Most buyers will use a conventional bank, and they’ll require an appraisal.
Assignment of Contract – When an investor decides to wholesale their deal, they’ll find another buyer (usually a fix & flipper) and “assign” them the contract for a fee.
Bandit Signs – These are those little signs that you’ll find at busy intersections. They’re a fairly profitable strategy for real estate investors, so long as they’re placed strategically. I recommend near Payday Loans, Walmart, pawn shops, or at the aforementioned busy intersection.
Bird Dog – Someone who identifies potential deals (motivated sellers willing to sell at a discount) and passes them along to an investor for a finder’s fee.
BRRR – Buy, Rehab, Rent, Refinance. It’s like a fix & flip deal, but instead of selling the property, the investor finds renters and then refinances the loan into a more traditional long-term loan. Perfect for monthly cash flow. We can help you refinance your loan with one of our partners.
Buyers Agent – The real estate agent who represents the buyer in a real estate sale. As an investor, you likely won’t be using one as you’ll usually be working directly with the seller. However, when you sell your finished rehab, you’ll want to hire an agent and sell your property on the MLS. This means there’s a buyers agent on the other side of your deal. Likely 6% of the property price will be split between the two agents, so figure that into your profit numbers accordingly.
Capital Gains – When you sell an investment property, the profit is subject to taxation. You can avoid capital gains by doing a 1031 exchange.
Cash on Cash Return – Similar to ROI, but usually calculated for a rental. Divide the annual cash return of a property by the cash that you invested. If you get $6k per year, and you invested $30k in the deal, you have a 20% return per year.
Cash Flow – Money coming to you on a regular basis. In real estate investing, this is most associated with owning a rental property where your renters cover your mortgage as well as add a little cash flow to your pocket.
Closing – The day when the transaction of buying the property is completed and money exchanges hands. You can technically back out any time before this day, but there’s a chance you’ll lose your earnest money. When doing a wholesale, this is your deadline for assigning the deal to another real estate investor.
Closing Costs – The amount of money that the buyer will bring to the table on closing day. How much you have to bring varies greatly depending on your funding source. Many hard money lenders require you to pay 10% of the purchase cost as well as other loan costs, often totally $30k – $50k.
Comps – Short for “comparables.” These are properties used to determine the value of a property. In real estate investing, it’s used mostly for determining what the after repair value will be. Our rule of thumb is to find three recently sold properties and three properties actively on the market. Then you take the lowest of those six and use that as your estimate for gross revenue on your deal.
Depreciation – This refers to anything that goes down in value. As the value of a house rarely depreciates, this refers most often to a rental owner where certain pieces of the house depreciate over time, and is used for tax purposes. For example, if you bought a roof for $27,000 and the life of the roof is expected to by 27 years, you can write off $1,000 per year. Other items include water heater, appliances, and furnace.
Due Diligence – This is the time frame after your offer your offer is accepted and ends before your closing day. During this time, you will usually bring in experts such as inspectors as well as your contractor to get a full rehab bid. You can decide to back out during this period with no repercussions.
Earnest Money – This is the deposit you make to the seller to show that you’re committed to buying the property. The investor can almost always back out and get their earnest money back, but isn’t the case in all situations. We typically recommend $500 – $1,000 in earnest money. This comes out of your pocket and is then used towards the purchase of the house.
Equity – The value of the house minus the amount left on the loan. As an investor, you must find discounted properties. No seller is going to give you a discount so severe that they still owe money on the house when all is said and done. For that reason, you’re going to be looking for properties with $50k+ in equity.
Escrow – A third party that holds the money for a real estate deal until its time for the money to be released.
Fix & Flip – A common type of real estate investing where an investor purchases a property at a discount from a motivated seller. They then fix up the property to increase its value and then sell it at a greater price than the original cost of the property, rehab, and loan fees.
Foreclosure – The process when the lender repossesses a property because of the borrower’s failure to make payments. A popular source of deals for real estate investors.
FRBO – For Rent By Owner. Owners of rental properties are prime targets for fix & flips, as they often come to a point where they’re annoyed with tenants, evictions, etc. I tell my students to call every one of these signs they drive by, and ask if they’re interested in selling that property…or any others they might own in their portfolio.
FSBO – For Sale By Owner. Sometimes the owner tries to sell the property themselves because they’re in a bind and don’t want to pay an agent. It’s worth a phone call to determine if there’s some sort of a problem that you can help them solve by purchasing the property.
Gap Financing – Money you secure to help you pay for your down payment on a property. This could be from a line of credit, a business partner, a credit card loan, or any other way you can secure financing. If you need gap financing, reach out to us and we’ll work with you to figure it out.
Hard Money – A type of loan that’s based on a “hard” asset, like a property. Hard money lenders care about the profitability of the deal, and their underwriting process usually involves verifying your valuations and estimates. Many hard money lenders also look at your experience with real estate investing and sometimes your credit score, although that’s often a less important metric. Traditional loans look at factors such as job history, debt to income ratio, and credit score. Traditional banks care about your ability to pay off the loan over a long period of time.
Holding Costs – This is the cost incurred from holding onto the property. These can include interest, taxes, insurance, and utilities.
Inspection – During the due diligence period, you’ll hire an inspector to determine the condition of the property. If the inspector finds issues with the property, you may need to bring in a more specialized inspector to determine the exact scope of the damage. At this point, you can bake the cost of fixing the issue into your final profit, or renegotiate with the seller that they fix the issue themselves, or more likely, that you get a lower purchase price to have your contractor fix it.
Interest – Your hard money loan or private source of funding will carry interest. With short-term loans for fix & flips, this will almost certainly be at least 10% so that the lender makes enough money to make it worth it. Look for a lender who won’t make you pay monthly interest payments—it’s much nicer paying it all at the end out of your profits instead of your pocket. We do it this way at Do Hard Money.
Lien – A claim against the property. For example, a mortgage is a voluntary lien that states the bank can take back the property for failure to pay. Involuntary liens might include tax or construction liens. Our loans are always first-position liens, meaning that we have first claim on a property should something happen. Properties with involuntary liens placed are another popular source of deals for investors.
Motivated Seller – A seller who is willing to take a discount on their property. This could be because the property is in disrepair, has a lien on it, about to be foreclosed on, or the owner has experienced a life change, such as inheriting the property, or a need to sell it ASAP before a move. Almost every time, the motivated seller has a good amount of equity in their property so they can take a discount and still pay off the remainder of their mortgage in full and potentially walk away with cash. You can read more about finding motivated sellers in our post about finding off-market properties.
Multi–Unit Properties – These are duplexes, triplexes, fourplexes…and more. Many investors like these because they provide the option for you to live in one side, and then the person or people renting out the other units can pay a good chunk of your mortgage, lowering your monthly costs considerably. Some investors like to invest in larger apartment buildings, but that’s on a totally different scope from a traditional fix & flip.
Offer – This is when a buyer submits a bid for how much they’d like to buy the property for. The seller can then accept it, reject it, or even come back with a counter offer. With myself and my students, how many offers placed is a core metric for measuring success. It’s a numbers game—you can know that after “x” number of offers, you’ll typically have a deal. For a brand new investor just getting started, that’s usually be 25-100 offers.
Proof of Funds – This is a letter from your lender that indicates that you have a source for funds. This isn’t a guarantee that your deal with qualify for the funds, but there is money to back up your offer.
Probate Sale – When someone dies without a will, a probate lawyer is hired to oversee the asset, and they in turn hire a real estate agent to sell the property. If the property is in bad shape, this is a good opportunity for you to purchase it.
Refinancing – This is restructuring your loan with a new one. In the investment world, this most often happens at the end of a BRRR deal. When you do a buy, rehab, rent, refinance deal, you’ll find and rehab the property like a regular fix & flip, but then at the end you won’t sell it. You’ll refinance with a conventional lender for a long-term loan with low interest rates.
Rehab – Fixing up a property to add value for resale. Also known as repairing or renovating. This is what adds value to the property so that you can fix & flip for a profit.
REO – Real Estate Owned properties are ones that are owned by a lender, usually a bank. Since banks aren’t in the business of owning property, they usually wish to sell these properties fast, making them prime targets for real estate investors.
ROI – Return on investment. As an investor, this is a term you should become very familiar with. This is a measure of how much profit your initial investment netted you, as a percentage.
Short Sale – This happens when a homeowner owes more on their property than the value of the deal, and they get approval from the lender to list at a lower price. A real estate investor can sometimes work with owners to facilitate a short sale and purchase the property themselves in order to help the owner get out of a bad loan situation.
Single Family Home – This is a 1-unit home without any other homes touching it. These are prime fix & flips targets.
Title – A legal document indicating a person’s ownership of a property.
Title Insurance – This protects lenders and buyers from property loss or damage that may occur because of defects to the title, such as liens, back taxes, or conflicting wills. This is important in fix & flips because you will likely be required by your lender to purchase title insurance, so figure in the cost accordingly.
Townhomes – These are houses that have another conjoined house on each side, except for the ones on the end only have a single shared wall. These are also good candidates for fix & flips, but in certain markets can be harder to sell because they may be high rental areas.
Turnkey Property – This is a property that is ready to go for renters. It doesn’t require any repairs or renovations. On this site we talk a lot about rehabbing a property first, but of course that’s not always necessary. The cash flow will generally be lower, but you’ll avoid the cost and hassle of a rehab.
Underwriting – The process of determining the financial viability of a deal. Our underwriters help with the evaluation of the deal (along with local evaluators we hire) and determine any risk factors, if the rehab scope makes sense, and overall if we should approve the loan and for how much.
Wholesaling – Another common type of real estate investing where an investor finds a property that is a great candidate for a fix & flip, but assigns the contract to another investor for a fee. Wholesalers do this because they get quicker paychecks, don’t have to secure financing, or manage a rehab. The second investor purchases the contract because they’re wiling to take on a full fix & flip for greater profits.
Wholetailing – A mixture between wholesaling and fix & flip. With this strategy the investor finds a property that only needs superficial improvements (typically ones that don’t require a contractor) such as painting, landscaping, or simple fixes. The investor then sells the property. It’s quicker than a fix & flip, but is typically more profitable than a wholesale deal.