Investing in fractional real estate can be intimidating for beginners and experienced investors alike. With so many terms to learn, it can be difficult to make sense of the jargon and start investing confidently. To help you out, we’ve put together this ultimate real estate investment terms glossary specifically for fractional real estate.
This comprehensive guide will cover everything you need to know, from commonly used jargon and acronyms to more technical terms. Whether you’re just starting or want to brush up on your knowledge, this glossary will help demystify fractional real estate investing.
Real Estate Investing Terms Glossary
Here are the must-know and useful real estate investment terms and their definition.
An accredited investor is an individual or entity that meets certain criteria set by the U.S. Securities and Exchange Commission (SEC) for investing in securities, such as stocks, bonds, or mutual funds. Individuals must be qualified to make these investments because of their financial sophistication and ability to bear the associated risks.
The SEC sets specific criteria to determine who can be considered an accredited investor. Generally, they must have a net worth of at least $1 million or income of at least $200,000 (or joint income of both parties in the case of married couples) over the last two years and expect to make the same amount this year.
Entities such as trust entities, investment companies, banks and other organizations regulated by the SEC can also qualify as accredited investors.
Appreciation is an increase in the value of a property due to market conditions or improvements made to the property. Real estate investors strive to buy properties that will appreciate, as this increases their returns on investment. Appreciation can occur naturally over time due to inflation, economic growth, and other factors. It can also be driven by improvements such as renovations or adding amenities like a pool.
Arbitrage is a type of real estate investment strategy that involves taking advantage of price discrepancies in different markets. Investors purchase property in one market and sell it for a higher price in another. Arbitrage investors look to capitalize on the differences between markets, such as fluctuations in interest rates, inflation rates, or exchange rates, to turn a profit.
The types of investments in arbitrage can range from stocks and bonds to real estate. By taking advantage of price discrepancies, investors can make money on the difference between what they pay for the property and what they earn by selling it at a higher price.
The BRRRR strategy is an acronym for Buy, Rehab, Rent, Refinance, Repeat. It is a popular real estate investing method that involves buying a property in need of repairs, improving it from its current condition, renting it out to tenants, and then refinancing the loan with the increased value of the property after rehab. The investor then has the option to repeat the process or invest in another property.
Many real estate investors prefer this strategy because it allows them to buy a property without their cash, use other people’s money to pay for improvements, and build equity faster as they make more money from rental income.
Investors also use this method for vacation rentals as it is a quickly growing market. You can rent properties to people looking for nice vacation homes.
Capital Expenditures (CAPEX)
Capital Expenditures (CAPEX) are funds used to purchase, improve, or extend the life of a real estate property. This includes any improvements made to increase the value and use of a property such as repairs, replacements, renovations, equipment purchases, furniture upgrades, and installations. CAPEX should be calculated into the budget when estimating profits and losses for property investment.
CAPEX is necessary to consider when evaluating the potential profitability of a real estate investment as it can affect the return on investment (ROI). Investing in upgrades to extend the life of a property, or increasing its value through improvements, can help investors maximize their ROI.
Cap Rate, or Capitalization Rate, is a key metric for evaluating potential real estate investments. It’s calculated as the ratio of net operating income divided by current market value. The cap rate reveals the return on investment – how much you can expect from rental income and other sources minus expenses like taxes, insurance, and maintenance.
If a property has a high cap rate, it indicates that it’s likely to be more profitable over time. On the flip side, if the cap rate is low, you can expect lower returns on investment or even losses. Knowing what is a good cap rate for rental property will help you make wiser investments.
Cash-on-cash return is an important metric that measures the relationship between what you invested and what you earned from a property, expressed as a percentage. In other words, it’s what investors get from the money they’ve put into a particular investment over a given period. Cash-on-cash return is closely related to the return on investment (ROI) metric, but it only looks at cash flow rather than total return. This means that things like appreciation or tax benefits are not factored into what investors can expect as a cash-on-cash return.
Co-ownership is a joint venture in which two or more individuals own real estate together. Co-owning a house may benefit spouses, family members, or business partners who want to share property ownership. Co-owners may have different roles and responsibilities regarding the maintenance of the property, as well as its management and disposition. Co-owners may choose to equally divide their rights, responsibilities, and interests in the property, or they may divide them unequally.
Co-owners can decide which decisions require a joint agreement and how to handle disputes. It’s important to create well-written property co-ownership agreements that clearly state the rights and responsibilities of each co-owner.
Crowdfunding is a great way for new real estate investors to get their feet wet in the industry. It involves pooling capital from multiple investors to purchase a piece of real estate together. This allows investors to get involved with larger investments than they could on their own or with limited capital.
With crowdfunding, investors can purchase a stake in the property and receive their respective share of the profits, including rental income or capital gains, when the property is sold. It also enables investors to diversify their investments and share in the risk of any one particular deal.
Debt investment is a type of real estate investing where you loan your capital to a borrower, who then pays regular interest payments and eventually repays the full loan amount. In this way, debt investing provides investors with more reliable returns through regular income payments than equity investments.
The risk associated with debt investments is the borrower’s ability to repay the loan. Debt investors may require a personal guarantee from the borrower and a lien on the property to protect their interests. Debt investments have different requirements and restrictions, including minimum investment amounts, loan-to-value requirements, and other stipulations.
Deeded is a real estate term used to describe a piece of property that has been formally transferred from one owner to another. In other words, it is the legal process of changing one person’s property ownership rights to another, usually through a deed or title transfer. In most cases, this type of transfer is done through a deed registered with the county recorder and state laws.
Depreciation is a way to account for the value of an asset over time. It’s typically used for income property, such as rental homes and apartments. Property owners can depreciate the value of a property by using an IRS-approved formula to calculate the reduction in value over a certain period.
Diversification is a key part of real estate investing. Investors spread their money across different assets and properties to reduce their risk rather than concentrating on one asset or property. Understanding diversification is key to building a successful investment portfolio.
Equity is the difference between what a property is worth and how much money you owe on it. For example, if you have a house worth $400,000 but the mortgage balance owed is $300,000, your equity in the house would be $100,000. Equity increases when you pay the mortgage or the property value increases. Equity can be used to access funds from a bank through loans or refinances, or it can be tapped into by selling the property for more than what is owed.
Flipping houses is a real estate investing term that refers to buying, renovating, and quickly reselling a property for a profit. This business model requires a major financial commitment, as investors are often required to pay for the full purchase price of the property and any repairs that need to be made. Flippers must be able to quickly locate lucrative investments and move on to the sale of the property before they can make a profit.
Fractional Investment is a real estate investing strategy that allows investors to purchase a partial interest in an income-producing property. The concept is similar to fractional ownership in other asset classes such as aircraft and artwork.
Investors can buy a fractional share of a property and pool their resources to purchase larger properties. This strategy allows investors to diversify their investments and reduce the capital needed for a single property.
Gross Rental Yield
Gross rental yield is a key metric used by real estate investors when evaluating potential investments. It can be calculated by dividing the annual rent of an investment property by its purchase price or market value. The resulting percentage indicates what percentage of the original investment is generated in rent each year.
For example, if a property is purchased for $100,000 and generates $10,000 in annual rent, the gross rental yield would be 10%.
Guest Usage is when non-owners or non-residents use a property for a short period, such as a vacation rental. Guests using rentals may be required to sign an agreement outlining the terms of their stay. Guest usage can be a great way to generate income from a property and is becoming increasingly popular among real estate investors.
Hard asset is a term used to describe real estate investments. These investments are considered “hard” because they are tangible, physical objects such as buildings, land, and the materials used to construct them. This is an important distinction from other investments such as stocks, bonds, and mutual funds, which are not physical objects and are thus considered “soft” assets. Hard assets are those which are considered investable items for revenue generation.
Home co-ownership is a form of real estate investment popular amongst individuals looking to purchase property together. Instead of one party owning a property outright, they can share its costs, responsibilities, and profits. When purchasing a home together, co-owners should have a clear understanding of their rights and responsibilities in terms of property ownership.
Co-ownership allows investors to diversify their portfolio with less investments and minimize the risks.
The Internal Rate of Return (IRR) is a key metric used to evaluate the profitability of an investment property. It measures the rate of return on an investment property over its holding period, considering all income and expenses. The IRR calculation factors in the time value of money by using a discount rate to determine the present value of cash flows.
The IRR calculation is beneficial for evaluating investments with multiple cash flows that vary in magnitude and timing. Since it factors in the time value of money, it can help investors compare different investments over different periods. Fully understanding IRR can help you protect your long-term investments and returns better.
Loan to Value
The loan-to-value (LTV) ratio is a measure of the loan amount relative to the value of a property. Lenders use it to determine how much they’re willing to lend on a particular property. Generally, the higher the LTV ratio, the higher the risk for the lender, which means a higher interest rate.
Lenders mostly require borrowers to make a down payment of at least 20% of the purchase price to secure a loan. However, some lenders may require higher down payments if they deem the LTV ratio too risky. When the LTV ratio is low, the borrower is seen as having more “equity” in the property, which makes them more attractive to lenders.
A mortgage is a loan to purchase property or for home improvement. The loan is secured by the house itself. If you cannot repay the loan, the lender can take possession of your home. The lender sets the mortgage interest rate which is usually based on credit history and the current market rate.
A shared equity mortgage is a type of mortgage that means the lender and borrower share any increase or decrease in the property’s value. The shared equity mortgage can benefit both parties, as they share in any appreciation or depreciation of the property. They are usually better than other types of loans because they offer more flexible repayment terms and lower interest rates.
A multi-member LLC (limited liability company) is an attractive structure used by real estate investors due to its flexibility. Unlike a corporation, which generally has a fixed structure with a board of directors and shareholders, an LLC can be custom-tailored to fit the needs of its members.
A multi-member LLC has two or more individuals who own and manage the company and share in profits or losses. It also offers more tax credits and deductions than a single-member LLC. The members of the LLC are not liable for each other’s actions and are protected from personal liability for the business’s debts.
A multi-member LLC provides excellent investment opportunities, but they are not for everyone due to the strings attached.
Non-Equity investments involve purchasing one or more real estate properties for cash flow purposes rather than appreciation. Non-equity real estate investments may range from individual properties purchased outright to larger portfolios of properties. In the case of real estate syndications, non-equity investors are often called “limited partners,” while the sponsor or manager handles day-to-day operations and typically retains a larger percentage of profits.
Ownership interest is the percentage of the property that an investor owns. When investors purchase a property, they may hold different ownership percentages, defining their rights over the property. For example, two investors may buy a property, each owning 50% of the interest.
Private Residence Club
Private Residence Clubs (PRCs) are a type of fractional ownership that offers vacation and recreational experiences. When a person purchases a membership to a PRC, they are purchasing rights to use the club’s facilities and amenities for a predetermined time each year. Unlike timeshares, PRC memberships are typically owned by a single family or individual and can be passed down from generation to generation.
A property manager is a professional who manages rental properties on behalf of landlords and investors. They are responsible for all aspects of tenant management, including finding and screening tenants, collecting rent, handling maintenance requests and repairs, responding to tenant complaints, enforcing the terms of the lease agreement, preparing financial statements, and more.
Property managers are an invaluable resource for real estate investors who need more time or expertise to manage their rental properties. But there is a lot more to property managers you should know if you ever think about becoming one.
A quarter share is a real estate investment structure where four individuals or entities own 25% of the property each. It’s ideal for investors looking for a more affordable way to invest in real estate, as each party puts up only 25% of the purchase price. It’s also an attractive option for those who want to reduce their risk, as each party is only responsible for a quarter of the debt and expenses associated with the property.
Real Estate Syndication
Real estate syndication is a type of investment strategy involving pooling funds from multiple investors to purchase and manage one or multiple properties. The syndicator is the syndicate’s leader and typically serves as the manager for the investment. They are responsible for identifying potential investments, conducting due diligence, negotiating terms, and managing day-to-day operations.
REIT stands for Real Estate Investment Trust. It is an organization that owns income-producing real estates, such as office buildings, shopping centers, apartments, and other types of commercial properties. These companies offer investors a way to invest in real estate without directly owning the physical property. REITs provide excellent opportunities for cash flow investments while keeping the risk minimum.
Shared ownership is a type of real estate investing arrangement in which multiple investors can purchase a property together and share the associated costs and profits. Each owner’s level of financial commitment and share of the property’s ownership will be outlined in a legal contract so that all parties know their rights and obligations.
The benefits of shared ownership include investing with less money up-front and pooling resources for larger investments that otherwise wouldn’t be possible.
Size of Share (or Fraction)
The size of share, or fraction, of a real estate investment, is the percentage to which you own it. For example, if one owns 10% of a real estate investment, they own one-tenth of the total ownership. Owning 50% grants you half of the total ownership, and so on. The size of share can vary depending on the total number of investors, who owns what percentage, and other factors.
Stress Test Rate
A stress test rate is a higher-than-usual interest rate used to help investors anticipate the potential effects of a rise in rates. If an investor has borrowed money to purchase a property, they can use the stress test rate to determine how their payments may change if interest rates increase.
The stress test rate is also used to assess a borrower’s ability to make payments if rates rise. This can help lenders determine an investor’s creditworthiness and ability to handle the loan.
Tenancy In Common
Tenancy in common is a type of property arrangement between two or more people. It allows multiple owners to have an undivided interest in a property, but not necessarily equal interests. Each owner is free to sell or give away their interest in the property whenever they want and may even pass it on to their heirs.
With tenancy in common, each owner has an undivided right to use and possess the entire property but is not obligated to share any profits earned. Tenancy in common is an increasingly popular form of investment because of its flexibility and many more benefits.
A timeshare is a real estate investment that allows multiple owners to own the same property for a specified period. These owners typically split the costs associated with purchasing and maintaining the property, such as taxes, insurance, utilities, and maintenance. Each owner is then entitled to a certain amount of use time at the property. Timeshares are most common in vacation homes, from beach resorts to ski lodges.
There are several more real estate terms you should know to make informed investments. When exploring the world of real estate investing, keep these terms in your back pocket, and you’ll be a pro before you know it. We recommend you bookmark this page and check it out whenever you doubt a real-estate investing term.