Glossary
Plain-English definitions with formulas and worked examples, written for landlords, managers, and investors.
A 1031 exchange is a tax-deferral strategy that lets you sell an investment property and roll the proceeds into a replacement property of equal or greater value, postponing federal capital gains taxes under Section 1031 of the Internal Revenue Code.
ReadCAM charges (Common Area Maintenance charges) are the portion of a commercial property's shared operating expenses that a tenant reimburses to the landlord, on top of base rent, based on the tenant's pro-rata share of the building's leasable space.
ReadThe capitalization rate (cap rate) tells you what percentage return a property would generate in one year if you paid all cash. It is calculated by dividing the property's net operating income by its current market value, and it is the most widely used shorthand for comparing investment properties side by side.
ReadCash flow is the net money a rental property produces each month after every expense has been paid, including the mortgage. Positive cash flow means the property puts money in your pocket; negative cash flow means it costs you money every month to hold it.
ReadCash on cash return (CoC) is the ratio of a property's annual pre-tax cash flow to the total cash you invested out of pocket, expressed as a percentage. It tells you how efficiently your actual dollars are working, regardless of financing or appreciation.
ReadThe Debt Service Coverage Ratio (DSCR) tells you how many times over a property's net operating income can cover its annual debt payments. A DSCR above 1.0 means the property generates more income than it costs to service the loan; below 1.0 means it does not.
ReadDepreciation is a non-cash IRS tax deduction that lets residential rental property owners write off the cost of a building over 27.5 years, lowering taxable income each year even when the property's market value is actually rising.
ReadEffective Gross Income (EGI) is the total income a rental property actually collects after subtracting vacancy losses and unpaid rent from the maximum rent it could charge if every unit were occupied and every tenant paid on time.
ReadEscrow is a legally binding arrangement where a neutral third party holds money, documents, or assets on behalf of a buyer and seller until every agreed-upon condition in a real estate transaction or lease has been satisfied. Once all conditions are met, the escrow agent releases the funds to the appropriate party.
ReadEviction is the court-supervised legal process a landlord must follow to remove a tenant who has violated the lease or failed to pay rent. It requires proper written notice, a filed court action, and a judge's order before any tenant can be compelled to leave.
ReadThe Fair Housing Act is a federal law that prohibits landlords, property managers, and real estate professionals from discriminating against tenants or buyers based on race, color, national origin, religion, sex, familial status, or disability. Violating it can result in federal complaints, lawsuits, and significant financial penalties.
ReadFair market rent (FMR) is the estimated monthly rent a property would command in a competitive, open market, assuming both landlord and tenant are acting freely and neither is under pressure to close the deal. HUD publishes official FMR figures annually by metro area and bedroom count, which serve as benchmarks for housing assistance programs and rent analysis.
ReadA gross lease is a rental agreement in which the tenant pays a single flat rent and the landlord covers most or all of the property's operating expenses, including taxes, insurance, and maintenance. It is the structural opposite of a net lease, where those costs shift to the tenant.
ReadGross Rent Multiplier (GRM) is a quick-screen metric that tells you how many years of a property's gross annual rent it would take to pay back the purchase price. It is calculated by dividing the property's price by its gross annual rental income.
ReadA guarantor is a person or entity that signs a lease agreement alongside the primary tenant and becomes legally responsible for rent, damages, and other lease obligations if the tenant fails to pay or vacates without settling what they owe.
ReadA holdover tenant is a renter who continues occupying a property after their lease has expired without signing a new lease or receiving permission to stay. Depending on whether the landlord accepts rent, the tenancy may convert to a month-to-month arrangement or the occupancy may be treated as trespass subject to eviction.
ReadThe implied warranty of habitability is a legal obligation, recognized in nearly every US state, that requires landlords to keep rental units safe, sanitary, and fit for human occupation throughout the entire tenancy, whether or not the lease spells it out.
ReadA lease concession is a one-time or short-term incentive a landlord offers a prospective or existing tenant to close a lease deal, typically without permanently reducing the stated asking rent. Common examples include one or two months of free rent, a reduced security deposit, or a tenant improvement allowance.
ReadLoan to Value (LTV) is the ratio of a property's outstanding mortgage balance to its current market value, expressed as a percentage. Lenders use it to gauge how much risk they are taking on before approving a loan or refinance.
ReadNet Operating Income (NOI) is the annual income a property generates after all operating expenses are subtracted from gross operating income, but before mortgage payments and income taxes. It is the clearest single-line measure of how much cash a property produces on its own merit.
ReadA notice to quit is a written legal document a landlord serves on a tenant demanding they vacate the property or correct a lease violation within a specified period, typically before the landlord can file for formal eviction in court.
ReadOperating Expense Ratio (OER) is the percentage of a rental property's gross operating income that gets consumed by operating expenses, before debt service. A lower OER means the property keeps more income as net operating income, which directly improves its value and cash flow.
ReadA pro forma is a forward-looking financial model that estimates a rental property's income, operating expenses, and net returns over a defined period, typically used to evaluate whether a deal makes sense before closing.
ReadProrated rent is the portion of a monthly rent charge that covers only the days a tenant actually occupies a unit during a partial month, calculated by dividing the monthly rent by the number of days in that month and multiplying by the days of occupancy. It most commonly applies at move-in and move-out.
ReadQuiet enjoyment is a tenant's legal right to possess and use a rental property without interference from the landlord or third parties. It does not mean silence; it means the tenant's possession is secure, peaceful, and undisturbed for the duration of the lease.
ReadRent control is a local or state law that limits the rent a landlord can charge for a unit and, in most versions, restricts how much that rent can increase each year. It applies to specific housing stock defined by the jurisdiction, not necessarily every rental property in a market.
ReadA rent roll is a snapshot document that lists every unit in a property alongside the tenant name, lease start and end dates, contracted rent, and current payment status. Lenders, buyers, and property managers treat it as the single authoritative record of a building's income-generating capacity.
ReadRent to income ratio is the percentage of a tenant's gross monthly income consumed by their monthly rent payment. Landlords use it as a front-line screening metric to judge whether an applicant can reliably afford the unit without financial strain.
ReadA security deposit is a sum of money collected from a tenant at the start of a lease that a landlord holds in trust to cover unpaid rent, lease-breaking fees, or repair costs beyond normal wear and tear. It is returned, in whole or in part, after the tenant vacates and the property is inspected.
ReadA sublease is an arrangement where a current tenant (the sublessor) rents all or part of their leased unit to a new occupant (the subtenant), while the original tenant remains legally bound to the landlord under the master lease.
ReadA Tenant Improvement Allowance (TIA) is a sum of money a landlord agrees to contribute toward customizing or building out a leased space to meet the incoming tenant's operational needs. It is typically expressed as a dollar amount per square foot and negotiated as part of the lease agreement before the tenant takes occupancy.
ReadTenant turnover is the process of a rental unit cycling from one occupant to the next, covering the gap between a departing tenant moving out and a new one moving in. It is one of the largest controllable expenses in a rental portfolio.
ReadA triple net lease (NNN) is a commercial lease structure where the tenant pays base rent plus three additional expense categories: property taxes, building insurance, and maintenance costs. The landlord collects a lower base rent but offloads most operating expenses to the tenant.
ReadVacancy rate is the percentage of rentable units in a property or portfolio that are unoccupied and not generating rent during a given period. A lower vacancy rate signals stronger leasing performance and more stable cash flow.
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