Real Estate Finance and Economics
Expert-defined terms from the Professional Certificate in Land Development course at LearnUNI. Free to read, free to share, paired with a globally recognised certification pathway.
Acceptance Rate #
Acceptance Rate is a ratio that shows the percentage of home loan applications that a lender approves. A lower acceptance rate indicates that the lender has stricter lending standards, while a higher acceptance rate suggests that the lender is more willing to approve loans.
Amortization #
Amortization is the process of gradually reducing the balance of a loan through regular payments of principal and interest over the life of the loan. This results in the complete repayment of the loan by the end of the loan term.
Appraisal #
Appraisal is an evaluation of a property's value by a licensed appraiser. The appraiser considers various factors, such as the property's location, size, condition, and comparable sales in the area, to determine the property's market value.
Balloon Payment #
Balloon Payment is a large, lump-sum payment due at the end of a loan term. This payment represents the remaining balance of the loan after the borrower has made regular payments for a specified period.
Capitalization Rate #
Capitalization Rate (or "cap rate") is a ratio used to calculate the potential rate of return on a real estate investment. It is calculated by dividing the property's net operating income by its market value or purchase price.
Closing Costs #
Closing Costs are fees and expenses associated with the purchase or sale of a property, paid at the closing of the transaction. These costs may include appraisal fees, loan origination fees, title insurance, and transfer taxes.
Commercial Real Estate #
Commercial Real Estate refers to properties used for business purposes, such as office buildings, retail centers, and industrial facilities.
Debt Service Coverage Ratio (DSCR) #
Debt Service Coverage Ratio (DSCR) is a financial metric used to determine a property's ability to generate sufficient cash flow to cover its debt obligations. DSCR is calculated by dividing the property's net operating income by its total debt service.
Economic Life #
Economic Life is the period during which a property is expected to generate sufficient income to cover its operating expenses, debt service, and a reasonable return on investment.
Equity #
Equity is the difference between the market value of a property and the outstanding balance of any mortgage or liens on the property.
Fair Market Value #
Fair Market Value is the price at which a property would sell in a competitive and open market, with both the buyer and seller acting knowledgeably, prudently, and without compulsion.
Hard Money Loan #
Hard Money Loan is a short-term, high-interest loan secured by real estate, typically used for the purpose of land development or property renovation.
Housing Affordability Index #
Housing Affordability Index is a measure of the relationship between median home prices, median household income, and mortgage interest rates. A higher index indicates that housing is more affordable, while a lower index suggests that housing is less affordable.
Income Approach #
Income Approach is a method used to estimate the value of a property based on its expected income. This approach is commonly used for commercial real estate and is calculated by dividing the property's net operating income by the capitalization rate.
Internal Rate of Return (IRR) #
Internal Rate of Return (IRR) is a financial metric used to evaluate the profitability of an investment. IRR represents the annual rate of return that would make the net present value of all cash flows equal to zero.
Land Development #
Land Development is the process of transforming raw land into a developed property, such as a residential subdivision or a commercial center. This process may include site preparation, grading, utility installation, and infrastructure development.
Lease #
Lease is a contract between a property owner (lessor) and a tenant (lessee), outlining the terms and conditions under which the tenant may occupy and use the property for a specified period.
Loan #
to-Value Ratio (LTV): Loan-to-Value Ratio (LTV) is a financial metric used to assess the risk associated with a mortgage loan. LTV is calculated by dividing the loan amount by the property's value or purchase price.
Market Value #
Market Value is the estimated price at which a property would sell in a competitive and open market, based on factors such as location, size, condition, and comparable sales.
Mortgage #
Mortgage is a loan secured by real property, typically used to finance the purchase of a home or other real estate. The borrower pledges the property as collateral for the loan and agrees to make regular payments of principal and interest over the loan term.
Net Operating Income (NOI) #
Net Operating Income (NOI) is a property's income, after deducting operating expenses, but before deducting debt service or income taxes.
Present Value #
Present Value is the current worth of a future sum of money, taking into account the time value of money and a specified discount rate.
Principal #
Principal is the original loan amount, excluding interest and fees. In real estate finance, principal refers to the outstanding balance of a mortgage or other loan.
Real Estate Investment Trust (REIT) #
Real Estate Investment Trust (REIT) is a company that owns, operates, or finances income-generating real estate properties. REITs allow individual investors to pool their resources and invest in a diversified portfolio of real estate assets.
Real Estate Syndication #
Real Estate Syndication is the pooling of resources from multiple investors to purchase a real estate property. This allows investors to participate in larger, more complex real estate transactions than they might be able to undertake individually.
Residential Real Estate #
Residential Real Estate refers to properties used for residential purposes, such as single-family homes, townhouses, and apartment buildings.
Return on Investment (ROI) #
Return on Investment (ROI) is a financial metric used to evaluate the profitability of an investment. ROI is calculated by dividing the investment's net profit by its cost.
Underwriting #
Underwriting is the process by which a lender evaluates a loan application to determine the borrower's creditworthiness and the risk associated with the loan. This process includes analyzing the borrower's financial history, the property's value, and the loan's terms and conditions.
Vacancy Rate #
Vacancy Rate is the percentage of rental units or commercial spaces that are vacant or unoccupied at a given time.
Zoning #
Zoning is the regulation of land use by local governments, typically through the use of zoning ordinances. Zoning regulations dictate the types of structures that can be built, their size and height, and their permitted uses in specific geographic areas.