Glossary
ARV (After-repair value):
After Repair Value (ARV) is the estimated value of a property after it has been fully renovated. It represents the potential selling price once all repairs and upgrades are completed. To determine ARV, you need to assess the local real estate market, compare similar properties, and understand how the planned improvements will impact the property’s value.
LOC (Loan-to-cost ratio):
Loan-to-Cost (LTC) is the ratio of the loan amount to the total cost of purchasing and renovating a property. It shows how much of the project cost is covered by the loan. A higher LTC ratio means the lender is financing a larger portion of the total cost, which may increase the risk and impact loan approval.
LTV (Loan-to-value ratio):
Loan-to-Value (LTV) is the ratio of the loan amount to the property’s appraised value or purchase price. It is calculated by dividing the loan amount by the property’s value. Lenders use LTV to assess risk; a lower LTV ratio indicates a lower risk for the lender and may result in better loan terms.
ROI (Return on investment):
Return on Investment (ROI) measures the profitability of an investment by comparing the profit earned to the cost of the investment. For fix and flip projects, ROI indicates the percentage of profit relative to the initial investment, helping investors assess financial success and make informed decisions.
Comps (Comparables):
Comparables (comps) are recently sold properties similar to the one you’re evaluating. They are used to estimate a property’s market value by comparing sale prices, features, and conditions. Comps help investors gauge potential returns and make informed decisions about buying and selling real estate.
Tax lien:
A Tax Lien is a legal claim imposed by the government on a property due to unpaid taxes. It ensures the collection of overdue taxes and can lead to the property being auctioned if the owner does not pay. For investors, purchasing tax lien properties can offer opportunities for acquiring real estate at lower costs, but it’s important to understand the associated risks.
Rehab:
Rehab refers to renovating a property by making necessary repairs and upgrades to enhance its appearance and functionality. The goal is to improve the property’s value and appeal to potential buyers.
Equity:
Equity is the value of a property owned by the owner after subtracting any debts or liabilities. It increases as mortgage payments are made or as the property’s value rises.
Scope of work:
Scope of Work is a document detailing all tasks, materials, and timelines required for a project. It defines what needs to be done, how long it will take, and the associated costs, helping to plan, execute, and manage the project efficiently.
Single-Family Home (SFH):
A Single-Family Home is a standalone residence designed for one family, with no shared walls with other buildings. It typically includes private living spaces such as bedrooms, bathrooms, and a kitchen, and is located on its own lot.
Multi-family Home:
A Multifamily Home is a building designed to accommodate multiple families, with separate units each having its own kitchen and bathroom. It provides several rental income streams and offers more living space but typically involves higher purchase, maintenance, and insurance costs.
Rehab Holdback:
A Rehab Holdback is a process where funds for renovations are held in escrow and released to the borrower only after satisfactory completion and approval of documented construction work.
Hard Cost Budget:
Hard Cost Budget refers to the portion of a project’s budget that covers expenses directly related to physical construction and renovation, including materials, labor, and equipment. This typically represents most of the total project cost.
Soft Cost Budget:
Soft Cost Budget refers to expenses related to planning, permitting, and administrative tasks for a project, which do not involve physical construction. These costs typically account for about 5% to 10% of the total project cost and can extend beyond the construction phase.
IO Payments:
IO Payments stand for Interest-Only payments, where the borrower pays only the interest on the loan for a specified period, with no principal repayment. This results in lower monthly payments initially but requires principal payments to start after the interest-only period ends.
GOI (Gross Operating Income):
Gross Operating Income (GOI) is the actual annual income a property generates after subtracting losses from vacancies and credit issues, representing the income collected each year.
NOI (Net Operating Income):
Net Operating Income (NOI) is the amount of income remaining after subtracting a property’s operating expenses and taxes from its Gross Operating Income (GOI). It measures the profitability of an income-generating property.
DSCR (Debt service coverage ratio):
The Debt Service Coverage Ratio (DSCR) is a financial metric used to evaluate a property’s ability to cover its debt obligations. It is calculated by dividing the net operating income (NOI) from the property by the total debt service (principal and interest payments).
A DSCR of 1.00x indicates that the property’s income just covers the debt payments, meaning it is “breaking even.” A DSCR greater than 1.00x signifies that the property generates more income than necessary to meet debt obligations, indicating positive cash flow. Conversely, a DSCR less than 1.00x means the property is not generating enough income to cover its debt payments, resulting in a negative cash flow.
Prepayment Penalty:
A prepayment penalty real estate loan is a mortgage that charges a fee if the borrower pays off the loan early. This fee is structured based on a schedule, such as “5/4/3/2/1” or “3/2/1,” where each number represents the percentage penalty applied if the loan is prepaid during a specific year of the term. For example, with a “5/4/3/2/1” schedule, the penalty is 5% if the loan is prepaid in the first year, 4% in the second year, and so on, decreasing each year until it reaches 1% in the fifth year. After the specified period, such as the first 5 years of a 30-year mortgage, there is no penalty for prepayment.
Seasoning:
In real estate, “seasoning” refers to the amount of time a property has been owned by an investor. It is often used to determine when a property becomes eligible for certain types of refinancing, such as cash-out refinances. Seasoning is usually expressed in months. Lenders have minimum seasoning requirements before allowing a refinance, with conventional lenders generally requiring a longer seasoning period compared to private lenders who may have shorter requirements.
Origination points:
Origination points in lending are fees charged by a lender for processing a loan. Expressed as a percentage of the loan amount, these points compensate the lender for their work in arranging and approving the loan. The number of origination points can vary depending on factors such as the borrower’s credit history, the level of risk associated with the loan, and the size of the loan.
Bridge Loan:
A bridge loan is a short-term loan designed to provide immediate cash flow until permanent financing is secured or an existing obligation is removed. Typically lasting up to one year, bridge loans have relatively high-interest rates and are often backed by collateral such as real estate or inventory. They help borrowers meet current financial needs while transitioning to long-term funding solutions.
