A term used by the Securities and Exchange Commission (SEC) under Regulation D to refer to investors who are financially sophisticated and have a reduced need for the protection provided by certain government filings. Accredited investors include individuals, banks, insurance companies,(...)
Loan that is repaid in a series of installments each of which contains a portion that is applied to reduce the principal amount of the loan and a portion that is applied to pay interest with each successive payment allocates a larger portion to principal reduction and a smaller portion to(...)
The true annual interest rate payable for a loan in one year taking account of all charges made to the borrower, including compound interest, discount points, commitment fees, and mortgage insurance premiums. The disclosure is required by the Truth-in-Lending Law.
An existing mortgage which allows the next purchaser of a property to be liable for the payments and other obligations of the note and mortgage. Depending on the type of loan, the assumption of the obligation by this next purchaser may or may not require a qualification and approval process(...)
A loan that has level monthly payments that will amortize it over a stated term (e.g., 30 years) but that requires a lump sum payment of the entire principal balance at the end of a shorter term (e.g., 10 years).
An installment payment which is larger (most often much larger) than the other scheduled payments. It is usually the last payment. If a note is written for $50,000 at a fixed 9.0% rate of interest with payments based on an amortization schedule of 30 years and a balloon payment due in 5 years,(...)
A written agreement purchased from a bonding company that guarantees a person will properly carry out a specific act, such as managing funds, showing up in court, providing good title to a piece of real estate or completing a construction project. If the person who purchased the bond fails at(...)
An individual who acts as an intermediary between two or more parties for the purpose of negotiating a transaction agreeable to all of the parties. In lending, the broker arranges and negotiates loan amounts, interest rates and loan terms between borrowers and lenders. Depending on the type of(...)
Ownership in real property implies a group of rights, such as the right of occupancy, use and enjoyment, the right to sell in whole or in part, the right to control the use, the right to bequeath, the right to lease any or all of the rights, the right to the benefits derived by occupancy and(...)
A provision of an adjustable-rate mortgage (ARM) that limits how much the interest rate or loan payments may increase or decrease. In upward rate markets, it protects the borrower from large increases in the interest rate or monthly payment.
(1) money used to create income, either as an investment in a business or an income property. (2) the money or property comprising the wealth owned or used by a person or business enterprise. (3) the accumulated wealth of a person or business. (4) the net worth of a business represented by the(...)
The cost of an improvement made to extend the useful life of a property or to add to its value, such as adding a room. The cost of repairing a property is not a capital expenditure. Capital expenditures are depreciated over their useful life; repairs are subtracted from income for the current(...)
Gain on the sale of a capital asset like real property. Capital gains enjoyed on assets held for a long term (generally at least one year) often enjoy lower tax rates than ordinary income. Taxable income is derived from the sale of a capital asset. It is equal to the sales price less the cost(...)
The capitalization rate, or “cap rate,” is a formula used to determine the value of a real estate investment – without taking into account any debt on the asset. The cap rate percentage is found by dividing the net operating income of a real estate asset (expenses minus income) by the current(...)
The net cash received in any period, taking into account net operating income (NOI), debt service, capital expenses, loan proceeds, sale revenues, and any other sources and uses of cash. Real estate investments are often structured to deliver steady cash flow with dividends that are(...)
This calculation shows when your monthly payment savings exceed your estimated closing costs and discount points. It does not consider the tax impact or differences in principal balance reduction between your current loan and the refinance suggestions.
A common metric for measuring the performance of a commercial real estate investment, which is sometimes also referred to as the cash yield. The cash-on-cash return rate can provide useful insight into the business plan for a property and the likelihood of receiving regular cash distributions(...)
Cash given to the borrower from the proceeds of a loan. While relatively common as part of a refinance, it is uncommon, but not impossible, as a benefit of a small percentage of non-conforming loans used for a purchase.
A refinance transaction in which the new loan amount exceeds the total of the principal balance of the existing first mortgage and any secondary mortgages or liens, together with closing costs and points for the new loan. This excess is usually given to the borrower in cash and can often be(...)
Commercial real estate applies a simple grading system to assets to rate overall quality and key characteristics. Buildings are classified as A, B, or C, and that ranking is an important indicator to gauge a property’s competitive position in a marketplace and where it fits in relation to(...)
The formal meeting where loan documents are signed and funds disbursed. Note, however, that Federal law requires that funds not be disbursed for three business days on certain loans where personal residences serve as the security.
A form used by a settlement or closing agent itemizing all charges imposed on a borrower and seller in a real estate transaction. This form gives a picture of the closing transaction, and provides each party with a complete list of incoming and outgoing funds. "Buyers" are referred to as(...)
A provision in a hazard insurance policy stating the minimum amount of coverage that must be maintained - as a percentage of the total value of the property - in order for the insured to collect the full amount of a loss
The notification that a lender has approved a loan. Virtually all commitments are issued conditionally; that is, subject to some list of conditions that must be satisfied prior to funding actually taking place. Typical conditions include appraisals of a certain value, clean title, verification(...)
As part of the appraisal process, those relatively recently sold properties which will be compared to the subject property (the property being appraised) for the purpose of forming an opinion of value for the subject property. The facts and details of the comparable properties will be compared(...)
A loan which has underwriting criteria consistent with (i.e., conforming to) those strict guidelines of Fannie Mae, Freddie Mac, FHA or VA. These are typically the lowest interest rate loans with very good terms.
A condition that must be met before a contract is legally binding. For example, home purchasers often include a contingency that specifies that the contract is not binding until the purchaser obtains a satisfactory home inspection report from a qualified home inspector
A real estate installment selling arrangement whereby the buyer may use, occupy, and enjoy land, but no deed is given by the seller until all or a specified part of the sale price has been paid, same as land contract.
A type of multiple ownership in which the residents of a multi-unit housing complex own shares in the cooperative corporation that owns the property, giving each resident the right to occupy a specific apartment or unit.
A loan that allows revolving use of the credit; that is, after funds have been borrowed and repaid they may be borrowed again without applying for a new loan. Typically, a credit limit is established and some or all of the available funds can be optionally disbursed at closing. Undisbursed(...)
Crowdfunding is a tool for raising money for businesses and an easier way to access such ventures for investors. As a result of the 2012 JOBS Act, real estate developers and owner/operators can rely on crowdfunding sites to solicit investments from high-net-worth investors who are qualified to(...)
A ratio used in underwriting loans for income producing property which is created by dividing net operating income by total debt service. Ratios of at least 1.10 are generally required with ratios of 1.20 and higher considered the norm.
Also known as debt to income. The ratio of the total of minimum monthly debt payments to gross monthly income. If minimum monthly payments on a credit card, auto lease, and mortgage (PITI) were $30, $220 and $750 respectively and the gross monthly income was $3000, the debt ratio would be(...)
DOT's are similar to mortgages in that they serve as security for a loan by encumbering real estate. However, a mortgage is between two parties (borrower and lender) and a deed of trust involves three parties (borrower, lender and trustee). The trustee holds the property in trust as security(...)
In mortgage finance, a shortfall of funds recovered through the sale of property securing a foreclosed loan compared to the amount of debt, accrued interest, foreclosure expenses, and damages incurred by the lender.
Depreciation decreases the accounting value of the physical structure of a real estate asset, as most assets decline in value over time, but does not affect the market value of a property. In its most basic form, the physical improvements of a property may be depreciated over a 27.5-year(...)
The distribution waterfall is the order in which distributions are made to limited and general partners. It is a hierarchy delineating the order in which funds are distributed and may ensure that different types of investors have priority of payment compared to others within the same investment.
This fee covers the expenses associated with this process of preparing some of the legal documents that you will be signing at the time of closing, such as the mortgage, note, and truth-in-lending statement.
The process of examining a property, related documents, and procedures conducted by or for the potential lender or purchaser to reduce risk. By applying a consistent standard of inspection and investigation one can determine if the actual conditions do or do not reflect the information as(...)
A federal law that requires lenders and other creditors to make credit equally available without discrimination based on race, color, religion, national origin, age, sex, marital status, or receipt of income from public assistance programs.
A legal doctrine in some states in which, under a contract of sale, buyers and sellers are treated as though the closing has taken place in that the seller in possession has an obligation to take care of the property.
The value of the unencumbered interest in real estate as determined by subtracting the total of the unpaid mortgage balances plus the sum of any current liens against the property from the property's fair market value. As it relates to real estate syndication, equity can be measured as the(...)
An agreement between two or more parties providing that certain instruments or property be placed with a third party for safekeeping, pending the fulfillment or performance of a specified act or condition.
An account from which funds can be disbursed only for specified reasons; i.e. the money is held in trust for a specific use. In lending, these accounts are most often used to hold and disburse real estate taxes and hazard insurance premiums which have been paid in advance (usually on a monthly(...)
The portion of a borrower's monthly payment that is held by the loan servicer to pay for taxes, hazard homeowners insurance, mortgage insurance, lease payments, and other items as they become due. Known as "impounds" or "reserves" in some states.
A written contract that gives a licensed real estate agent the exclusive right to sell a property for a specified time, but reserving the owner's right to sell the property alone without the payment of a commission.
Actual payment of cash or cash-equivalent for goods or services, or a charge against available funds in settlement of an obligation as evidenced by an invoice, receipt, voucher, or other such document.
An obligation to act in the best interest of another party. This type of obligation typically exists when one person places special trust and confidence in another person and that responsibility is accepted.
The mortgage which is recorded at the earliest time. The time of recording is the sole criteria. Size of loan and type of mortgage are immaterial. When the first mortgage is paid off and released, the second mortgage (if any existed) becomes the first mortgage.
Is a percentage share of an expensive asset or property acquired jointly by a group of persons or businesses. Shares are sold/titled to individual owners. A fractional owner enjoys use or income of such property on an agreed basis. Such as reduced rates, priority access on holidays and income(...)
An evaluation of the difference in the demand and supply of space for a particular type of commercial property in a given market area where gaps are expressed as the amount of square footage demanded less the amount of square footage available in a given period of time.
A mortgage that requires a borrower to make larger monthly payments over the term of the loan. The payment is unusually low for the first few years but gradually rises until year three or five, then remains fixed.
The amount of money needed to pay principal, interest and taxes, and sometimes energy costs. If the dwelling unit is a condominium, all or a portion of common fees are excluded, depending on what expenses are covered.
A loan that is underwritten with the condition and value of the property as the primary criteria for approval. Secondary issues may include the credit of the borrower, the ability of the borrower to repay the loan and/or the ability of the borrower to manage the property or successfully(...)
A hold period is the anticipated time investors will be involved with the investment until the underlying property is re-sold. It is important to read the offering documents for each investment opportunity for a deeper understanding of the hold period for each investment.
In the most literal sense, this expression applies to virtually all loans (first mortgages and second mortgages, fixed and adjustable interest rates, credit lines and fully amortizing loans, etc.) placed on an owner occupied property when the loan-to-value after the Home Equity Loan closes is(...)
Insurance coverage that compensates for physical damage to a property from fire, wind, vandalism, or other hazards. The policy typically combines personal liability insurance and property hazard insurance coverage for a dwelling and its contents.
A legal doctrine that requires landlords to offer and maintain livable premises for their tenants. If a landlord fails to provide habitable housing, tenants in most states may legally withhold rent or take other measures, including hiring someone to fix the problem or moving out.
Any control over property. If you give away property but keep an incident of ownership. For example, you give away an apartment building but retain the right to receive rent; then legally, no gift has been made. This distinction can be important if you're making large gifts to reduce your(...)
The published cost of money that serves as the minimum basis for determining the interest rate for an adjustable rate mortgage. Among the commonly used indices are the Prime Rate (Prime), the London Interbank Offering Rate (LIBOR), the Cost of Funds (COF) and the 1 year Treasury Bill (1 year(...)
Is associated with an Adjustable Rate Mortgage (ARM), it is the time between changes in the interest rate and/or monthly payment, usually one, three, or five years. The adjustment periods are usually spelled out in your original loan documents.
A mortgage that is protected by the Federal Housing Administration (FHA) or by private mortgage insurance (PMI). If the borrower defaults on the loan, the insurer must pay the lender the lesser of the loss incurred or the insured amount.
A temporary buydown gives a borrower a reduced monthly payment during the first few years of a home loan and is typically paid for in an initial lump sum made by the seller, lender, or borrower. A permanent buydown is paid the same way but reduces the interest rate over the entire life of a(...)
In real estate, the Internal Rate of Return (IRR) is a metric used to evaluate the profitability of an investment over its lifetime and is represented as the average annual return percentage. The metric most commonly used to measure profitability of a potential real estate investment. The IRR(...)
While the Securities and Exchange Commission regulates public securities on a national level, each state also has its own regulatory entity serving a similar function. Since the passage of the JOBS Act, advocates of equity crowdfunding have moved to legalize intrastate – or in state – crowdfunding.
An investment property is a real estate asset purchased with the sole purpose of earning income. Income from an investment property can be generated through leasing space within an asset or an eventual sale of the asset.
A loan larger than the maximum allowed by conforming loans. The threshold amount has traditionally been adjusted more or less on an annual basis and has been in the low $400,000's. Banks and mortgage brokers can quote the current threshold. They are typically available at interest rates(...)
The Jumpstart Our Business Startups Act, or JOBS Act, is a law intended to encourage funding of small businesses in the United States by easing many of the country's securities regulations. It was signed into law on April 5, 2012. Title III, also known as the Crowd Fund Act, has drawn the most(...)
A revocable, living trust primarily used to hold title to real estate for privacy and anonymity. Also known as an Illinois Land Trust or Nominee Trust. The land trustee is a nominal title holder, with the beneficiaries having the exclusive right to direct and control the actions of the trustee.
The highest amount over the initial interest rate that an adjustable mortgage can be raised. Lifetime caps are typically in the range of 5.0% - 7.0%. If the initial interest rate is 5.25% and the lifetime cap is 6.0%, the highest interest rate a borrower could pay during the course of the loan(...)
A partnership structure where “limited partners” are passive investors whose liability is limited to the amounts invested, but where at least one partner is a “general partner” whose liability is general in nature and not limited.
Liquidity refers to the ease with which an asset can be purchased or sold. Marketable securities that are traded in high volume tend to be the most liquid, or easy to trade without creating wild fluctuations in price.
The organized group of documents that contains all of the information required to obtain an underwriting decision of loan approval or loan denial. Depending on the type of loan and the particular lender, a package may contain some or all of the following as well as other documents: loan(...)
The amount of money borrowed in relation to the total market value of a property. Expressed as the loan amount divided by the property value. If the loan is $80,000 and the value of the property is $100,000 the LTV is 80% ($80,000 / $100,000).
A constant (fixed) amount over an index that determines a lender's yield on an adjustable rate loan. The interest rate of an adjustable rate loan is determined by adding a margin to an index. The size of the margin is typically a function of the index used and the credit worthiness of the(...)
A loan that is of lesser priority than a first mortgage or deed of trust. It may also have loans subordinate to it (hence "mezzanine"). Generally has the same priority as if it were called a second mortgage.
Mezzanine Debt is generally a loan that is secured by a property and senior to any equity, but junior to the senior loan on the property. Preferred Equity, on the other hand, is an equity investment in the property-owning entity. It is not secured by the property but rather by an interest in(...)
The minimum amount that must be paid monthly on an account. On the HELOC product, the minimum payment is interest only during the draw period. On the Fixed Rate Second products, the minimum payment is principal and interest.
Some adjustable rate mortgages allow the interest rate to fluctuate independently of a required minimum payment. If a borrower makes the minimum payment it may not cover all of the interest that would normally be due at the current interest rate. In essence, the borrower is deferring the(...)
A type of loan generally limited to the self-employed that is underwritten based on the borrower's written representation of their annual income as stated on the loan application. No tax returns, operating statements or other verification of the income is required. Debt ratios are computed(...)
Cash outlays necessary to operate and maintain a property. Examples of operating expenses include real estate taxes, property insurance, property management and maintenance expenses, utilities, and legal or accounting expenses. Operating expenses do not include capital expenditures, debt(...)
Opportunity Zones are census tracts generally composed of economically distressed communities that qualify for a community development program called the Opportunity Zone program, which was created under the Tax Cuts and Jobs Act of 2017.
A fee paid to either a broker or a lender for originating a loan. It may be the only compensation for their work in arranging and/or processing the loan or it may be only a portion of the compensation. Not every loan has an origination fee.
An individual who works with a borrower to start a loan. Usually an employee of a financial institution, an employee of a broker or an independent contractor affiliated with several brokers, the originator determines the type of loan a borrower probably qualifies for, helps complete an(...)
Refers to real property owned by a bank that does generally have a "home lending dept" per se. Its a REO that is the result of foreclosure on a property Refers to real property owned by a bank that does generally have a "home lending dept" per se. It's a REO that is the result of foreclosure(...)
A method in which a buyer borrows from and makes payments to the seller instead of a bank. Sometimes you take over the seller's payments. Can be done when a buyer cannot qualify for a bank loan for the full amount.
In a passive real estate investment, the investor makes an upfront capital investment as an equity-based vehicle and then receives an ownership stake in that investment, from which the investor is paid dividends or other types of regular income that is somewhat automated.
The shorthand way of stating the most usual elements of a residential mortgage payment which may consist not only of the Principal and Interest (PI) but the property taxes (T) and hazard insurance (I) as well. In the case where all four elements are part of the payment, the lender escrows the(...)
A highly designed residential project that features relatively dense clusters of houses, which are usually surrounded by areas of commonly owned open space maintained by a nonprofit community association.
A private equity (PE) fund is a collective investment model where money from separate investors is pooled together into a single fund and then used to make investments, most often in various illiquid equity and debt assets.
A legal document that states the objectives, risks and terms of an investment involved with a private placement. This document includes items such as a company's financial statements, management biographies, a detailed description of the business operations, and more. An offering memorandum(...)
A financial model often used in real estate to predict future cash flows and total investment returns. Refers to the presentation of data, such as a balance of income statement, where certain amounts are hypothetical. For example, a pro forma balance sheet might show a debt issue that has been(...)
The process of establishing the validity of a will before a duly authorized court or person. Once validity is confirmed, the probate court then administers the sale of property as directed by the will or as authorized by the court to settle any financial obligations.
A REIT (which is pronounced “reet” and stands for Real Estate Investment Trust) is a company which makes investments in and owns income-generating real estate properties and then distributes any profits to the investors.
Also known as residual or passive income, recurring income is earned by creating or acquiring an asset that continues to pay of profits regardless of if there is still active work being done to the asset.
Regulation D permits raises of unlimited amounts from accredited investors without registering a public sale through the SEC, as it’s assumed that accredited investors are financially able to bear the burden of investment decisions without a review by the SEC.
A federally mandated period of three business days (beginning on the day after a loan closes) during which the borrower may cancel the new loan, waiting period only applies to loans which are to be secured by a mortgage on a personal residence for which the borrower is in title at the time of(...)
A type of mortgage designed for elderly homeowners with substantial equity by which a lender pays a periodic payment to the borrower; the loan balances increase with interest and payments causing negative amortization.
Schedule K-1 is a tax document used to report the incomes, losses, and dividends of a partnership. The Schedule K-1 document is prepared for each individual partner and is included with the partner’s personal tax return.
A secured position in the Capital Stack retains the right to foreclose on a property in the event of a default, or non-performance. Unsecured creditors do not have the right to foreclose on the property, and therefore have less collateral backing their investment claim.
A retirement account in which the individual investor is in charge of making all investment decisions. The self-directed IRA provides the investor with greater opportunity for asset diversification outside of the traditional stocks, bonds and mutual funds, such as real estate. In addition to(...)
A sale of a house in which the proceeds fall short of what the owner still owes on the mortgage. Many lenders will agree to accept the proceeds of a short sale and forgive the rest of what is owed on the mortgage when the owner cannot make the mortgage payments. By accepting a short sale, the(...)
A sponsor is the managing leader of a real estate project who researches the market, identifies a property to be acquired, organizes the investors and bank financing in order to make the purchase, oversees the subsequent management of the property, and determines when it is to be sold.
A step-up basis is the adjustment of a cost basis for an asset for an investor. Certain factors may initiate a step-up in an investor’s original cost basis, thereby reducing their realized capital gain and associated tax liability.
A professional financial services group formed temporarily for the purpose of handling a large transaction that would be hard or impossible for the entities involved to handle individually. Syndication allows companies to pool their resources and share risks.
Another key advantage of real estate investing is that it is a good way to diversify portfolios that are backed by hard assets. Real estate is not the same as buying shares in a company that may be here today and gone tomorrow.
A phrase that, when inserted in a contract, requires that all references to specific dates and times of day noted in the contract be interpreted exactly, in its absence extreme delays might be acceptable.
Outlined in the 2012 JOBS Act, Title III instructed the SEC to create an exemption from registration that, when implemented, will enable issuers to engage in crowdfunding equity offerings to the general investing public.
Short term financing or a bridge loan you use to buy a property. Investor arranges for a short-term loan to fund the purchase and then resells the property to earn the profit margin, using the proceeds to repay the loan. Generally done within 45 days and issued in the name of a business(...)
A lease agreement that designates the lessee (the tenant) as being solely responsible for all of the costs relating to the asset being leased in addition to the rent fee applied under the lease, so that the landlord receives net rent. Operating expenses paid by the tenant include; taxes,(...)
A legal entity creating fiduciary relationship in which one party, known as a trustor, gives another party, the trustee, the right to hold title to property or assets for the benefit of a third party, the beneficiary.
Conveyance of real estate to a third party to be held for the benefit of another, commonly used in some states in place of mortgages that conditionally convey title to the lender, same as Deed of Trust.
Value-add commercial real estate investments typically target properties that have in-place cash flow, but seek to increase that cash flow over time by making improvements to or repositioning the property. This could include making physical improvements to the asset that will allow it to(...)
In the context of commercial real estate, yield refers to the annual cash return on the investment, expressed as a percentage of the investment’s initial cost, or less frequently, its estimated current value.