Glossary

Real estate terms, explained.

The words investors, lenders and commercial brokers use, in plain language. Have a question about a term or a deal? Call or text me at 847-708-5663.

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Cap rate: A building's yearly net operating income divided by its price. It shows the return before any mortgage, so you can compare buildings fairly.
Net operating income (NOI): All the income a property collects, minus vacancy and operating expenses like taxes, insurance, repairs and management. It does not include the mortgage payment.
Cash flow: What's left each month after every expense and the mortgage are paid. Positive cash flow means the building pays you; negative means you pay it.
Cash-on-cash return: One year of cash flow divided by the cash you put in: down payment, closing costs and rehab. It answers what your money is actually earning.
DSCR (debt service coverage ratio): Net operating income divided by the yearly mortgage payments. Lenders often want 1.20 to 1.25 or higher; below 1.0 the rent doesn't cover the loan.
Gross rent multiplier (GRM): Price divided by yearly gross rent. A quick first filter for 2–4 unit buildings: a lower number usually means more rent for the price.
IRR (internal rate of return): Your total yearly return over the whole time you own a property, counting cash flow, loan paydown and the profit when you sell.
Equity: What the property is worth minus what you still owe on it. It grows as you pay down the loan and as the value rises.
Leverage: Using a loan to buy more property than your cash alone could. It can raise your returns, and it also raises your risk.
Value-add: Buying a property you can improve, through renovation, better management, higher rents or added units, so it's worth more than you paid.
ARV (after-repair value): What a property should be worth once the planned renovation is finished, based on recent sales of similar updated buildings.
CapEx (capital expenditures): Big, occasional costs like a roof, boiler, windows or tuck-pointing. Smart investors set money aside every month so these don't surprise them.
Rent roll: A list of every unit with its tenant, rent, lease dates and deposit. It's the first document to ask for when you look at a building.
Pro forma: A projection of what a property could earn, often using the seller's best-case numbers. Always compare it to the real rent roll and expenses.
House hacking: Living in one unit of a 2–4 unit building and renting the others, so the rent helps pay your mortgage. Owner-occupant loans can need a smaller down payment.
BRRRR: Buy, rehab, rent, refinance, repeat: renovate a property, rent it out, then refinance to pull your cash back out for the next deal.
1031 exchange: A federal tax rule that lets you sell an investment property and put the proceeds into another one while deferring capital gains taxes. Strict deadlines apply; work with a CPA and a qualified intermediary.

Triple net lease (NNN): A lease where the tenant pays rent plus the property's taxes, insurance and maintenance. Common for retail and single-tenant buildings.
Gross lease: A lease where the tenant pays one set rent and the landlord covers the building's operating costs.
Modified gross lease: A middle ground: the tenant and landlord split certain costs, such as utilities or increases in taxes, as spelled out in the lease.
CAM charges: Common area maintenance: each tenant's share of costs for shared spaces like parking lots, hallways, snow removal and landscaping.
Rentable vs. usable square feet: Usable is the space you actually occupy. Rentable adds your share of common areas like lobbies and restrooms, and rent is usually charged on rentable.
Tenant improvements (TI): Build-out work that customizes a space for a tenant. A landlord often offers a TI allowance, a set amount per square foot, to help pay for it.
Letter of intent (LOI): A short, usually non-binding letter that lays out the main deal terms, like price or rent, length and contingencies, before the full contract or lease is written.
Escalation clause: A lease term that raises the rent on a set schedule, such as 3% a year, or ties increases to inflation.
Personal guaranty: A promise by a business owner to cover the lease personally if the business can't pay. Landlords often ask for one from newer businesses.
Owner-user: A business that buys the building it operates from instead of leasing. It builds equity and locks in the location.
Sale-leaseback: A business sells its building to an investor and leases it back, freeing up cash while staying in place.
Build-to-suit: A building designed and built for a specific tenant, who signs a long lease before or during construction.
Anchor tenant: A major tenant, like a grocery store, that draws customers to a shopping center and helps the smaller shops around it.
Building class (A, B, C): A shorthand for quality and age. Class A is newer and top-tier, Class B is older but well kept, and Class C needs work and usually rents for less.
Zoning: City rules for what a property can be used for and how big a building can be. Always confirm a business use is allowed before you sign.
Estoppel certificate: A tenant's signed statement confirming the lease terms, rent and any disputes. Buyers and lenders ask for it before closing on a leased building.

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General information only, not legal, tax or financial advice.

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