A plain-language reference of the terms you'll encounter when analyzing rental deals, talking to lenders, or reading our articles. Bookmark it for quick lookups.
- Cap Rate (Capitalization Rate)
- Annual net operating income divided by purchase price. Measures unlevered yield and lets you compare properties on equal footing regardless of how they're financed.
- Cash Flow
- Money left over each month after collecting rent and paying every operating expense plus the mortgage. Positive cash flow means the property pays for itself.
- Cash-on-Cash Return
- Annual pre-tax cash flow divided by the actual cash you invested (down payment + closing costs + initial repairs). Measures how hard your invested dollars are working.
- Closing Costs
- One-time fees paid at the time of purchase: legal fees, lender fees, inspection, title insurance, transfer taxes, and broker fees. Typically 2–5% of the purchase price.
- Debt-Service Coverage Ratio (DSCR)
- Net operating income divided by annual mortgage payments. Lenders typically want at least 1.20. Below 1.0 means the property doesn't earn enough to cover debt.
- Depreciation
- An accounting deduction that lets you write off a portion of the building's value each year against rental income for tax purposes.
- Equity
- The portion of the property's value that you own outright — purchase price minus what you still owe on the mortgage, adjusted for any change in market value.
- Gross Rent Multiplier (GRM)
- Purchase price divided by annual gross rent. A quick screening number — lower is generally better, but it ignores expenses.
- Loan-to-Value (LTV)
- Loan amount divided by the property's value or purchase price. Higher LTV means less money down and more leverage — both reward and risk.
- Net Operating Income (NOI)
- Annual rental income minus operating expenses, before mortgage payments. The denominator of cap rate and the most-used measure of property profitability.
- Operating Expenses
- All recurring costs of running the property: taxes, insurance, maintenance reserve, vacancy reserve, property management, HOA fees, and utilities you cover. Excludes mortgage.
- Principal & Interest (P&I)
- The portion of a mortgage payment that pays down the loan (principal) and the bank's fee for lending (interest). Excludes taxes and insurance held in escrow.
- Property Management Fee
- Typically 8–10% of collected rent paid to a third party who handles tenants, maintenance, and rent collection on your behalf. Budget for it even if you self-manage today.
- Rent Roll
- A document listing every unit, its tenant, the rent, the lease start and end dates, and any deposits held — the single most important document when buying a tenanted building.
- Vacancy Rate
- The percentage of time a unit sits empty. Even great properties experience vacancy; a 5–8% reserve is standard for residential rentals.
- Yield
- A general term for the return on investment expressed as a percentage. In rental real estate it usually refers to cap rate or cash-on-cash return.
- 1% Rule
- A quick screening test: monthly rent should be at least 1% of the purchase price. A property at $200,000 should rent for at least $2,000/month to pass.
- 50% Rule
- A back-of-envelope estimate that operating expenses (excluding mortgage) tend to consume around 50% of gross rent over the long run. Useful as a sanity check.