As a new real estate investor, you'll need to know a robust list of industry terms as you look for financing and property. Review the essentials here.

Most businesses have their own terminology for specialized or technical details. It can seem like an entirely separate language sometimes. The real estate investment industry is no different. The following are commonly used terms in the private lending space, including hard money lenders.

After-repair value (ARV)

ARV is the projected value of a property once repairs or renovations are complete. For hard money lenders, ARV is one of the most important factors in determining whether or not to approve a loan, as well as the amount of the loan.

Calculating the ARV for a property can be complicated. It involves multiple factors, including the current value of the property, the cost of the planned repairs or renovations, and the market conditions in the area.

As-is value

A property’s as-is value is how much it is worth at the present moment, without any repairs or improvements.

Balloon payment

A balloon payment is a large payment made at the end of a loan term to pay the loan off in full. Balloon payments are not common in residential mortgages, but they may appear in commercial loans, hard money loans, and other types of financing.

Bridge loan

A bridge loan is a short-term loan that provides funding for an investor during a renovation or other project. The loan term could be as short as one or two years in some cases. Investors often seek bridge loans when they need to close quickly. Bridge loans serve investors until they can find longer-term financing.

Buy, rehab, rent, refinance, repeat (BRRRR)

BRRRR is a real estate investment strategy. You buy a distressed property, rehabilitate it, rent it out, draw cash from your equity via refinancing, and repeat the process. The BRRRR strategy is meant to help investors build their real estate portfolio. It’s possible to incorporate bridge loans (short-term loans) into a BRRRR strategy with a hard money lender.

Capitalization rate

The capitalization rate or “cap rate” is a metric that real estate investors can use to estimate the value of a project. It is the ratio of a property’s annual net operating income to its current market value.

For example, suppose that a rental property produces gross rental income of $75,000 per year and costs $15,000 in maintenance, property taxes, and other expenses. This gives it a net annual income of $60,000. The property’s current market value is $1 million. The property’s capitalization rate would be 60,000 divided by 1 million, or 6%.

Comparative market analysis (CMA)

A CMA is an estimate of a residential property’s market value based on recent comparable sales in the area and other factors. It can help sellers determine listing prices. It can also help buyers negotiate sales prices.

Debt service coverage ratio (DSCR)

This ratio helps hard money lenders assess investors’ ability to make payments on loans for rental property investments. The ratio typically consists of a property’s net operating income divided by its total annual debt payments.

The higher an investment’s DSCR, the more profitable it is likely to be. Hard money lenders usually require a DSCR of at least 1.0 to 1.2. A property with a DSCR below 1.0 is going to lose money if it cannot increase its revenue or reduce its debt payments.

Debt-to-income ratio (DTI)

DTI is the ratio of a borrower’s total monthly debt payments to their gross monthly income. Mortgage lenders and private money lenders use this ratio to evaluate a loan applicant’s creditworthiness.

Distressed property

***Photo by*** ***David Berry*** on ***Flickr*** [***Creative Commons***]

A distressed property is in need of substantial repair or renovation work because of damage or neglect.

Draw schedule

A draw schedule is a timeline of when you can receive funds from your lender. You may get 20% of your approved loan amount upfront to give to your builder. This amount will vary. Then, once your builder reaches certain milestones, more money is released from the lender. Your builder may issue draw requests to you and your lender, stating what they need the next chunk of money for. Draw schedules keep everyone on schedule and accountable for success.

Due diligence

This term refers to the process of researching and evaluating a potential investment property and project. You, as a borrower, as well as your lender, should take the due diligence needed to conclude that the risks are worth the potential reward. The lender is also responsible for ensuring they’ve seen reasonable evidence that you have the ability to repay your loan as agreed upon.

Exit strategy

Before beginning a project, real estate investors should have a plan for how they will pay off their loans and divest themselves of the investment property. An exit strategy can include multiple options, from best- to worst-case. It shows your private or hard money lender how you plan to profit from the project and repay the loan they give you. They’ll want to hear about your plan before they fund your project.

Fix and flip

A fix-and-flip investment involves purchasing a property with the intent to rehabilitate or renovate it and then sell it for a profit (i.e. “flip”). Fix-and-flip projects are short term, often being in about a year or less.

Hard costs

Hard costs are costs that an investor incurs that are directly related to building, repairing, or renovating a property, such as labor and material expenses. These costs go toward physical assets.

Hard money lender

A hard money lender loans money to real estate investors based primarily on the value of the investment property. They tend not to put as much emphasis on an investor’s credit or financial history. Instead, they focus on the value of the “hard” physical investment asset.

Hard money lenders tend to take on more risk than private money lenders. They charge higher fees and interest rates as a result. Easier qualification, a more personal relationship with your lender, and much faster closing times are the significant advantages of a hard money lender when compared to traditional banks.

Holdback

Hard money lenders may “hold back” some or all of the funds from a loan until the investment project reaches certain milestones, often based on a construction draw schedule. The lender needs to make sure the project is progressing as agreed upon before they release more funds.

Holding costs

This term refers to expenses related to owning a property, such as utilities, maintenance, insurance, and property taxes. They are also known as “carrying costs.”

Interest-only payment

This type of payment consists of one month of interest on a loan’s outstanding balance. A loan with interest-only payments might have a substantial balloon payment at the end of the loan term. The advantage is lower payments, while the drawback is making those payments without gaining equity.

Joint venture

Investment projects that involve two or more investors are often called joint ventures. They may consist of multiple individuals or business entities working together as a partnership. LLCs and other business entities are eligible for hard money loans.

Loan term

The term of a loan is the total amount of time that a borrower has to repay it in full. Residential mortgages typically have terms of 15 or 30 years. Hard money loans and other loans used in investments may have much shorter terms: typically from as short as a few months to as long as two or three years.

Loan-to-cost ratio (LTC)

The LTC is the ratio of the loan amount to the total cost of purchasing and renovating an investment property. Hard money lenders often use the LTC to determine how much to loan for fix-and-flip projects and other investments.

Loan-to-value ratio (LTV)

The LTV is the ratio of the loan amount to an investment property’s current appraised value. Hard money lenders require investors to have a minimum amount of equity in an investment property, usually 20% to 30% of its value. As a result, they want to see an LTV of 70% to 80%.

Non-conforming loan

Most residential mortgages meet standards and guidelines set by Fannie Mae and Freddie Mac intended to protect consumers. Those are conforming loans. Loans that do not meet these guidelines are called non-conforming loans. Loans from any private lender, including hard money lenders, will be non-conforming: they don’t abide by the same loan amount limits, credit score requirements, and they aren’t necessarily sold off to Fannie and Freddie for servicing. In fact, some hard money lenders even have their own in-house servicing department (like Capstone Capital Partners).

Origination fee

A lender may charge a borrower an origination fee for their services in facilitating the loan. “Origination” refers to creating the loan in the first place. There’s money to be earned in this as a lender, as well as by interest throughout the life of the loan.

Points

Lenders may charge a fee at closing based on the total amount of the loan. Each percentage point of the loan amount is one “point” charged to the borrower. Hard money lenders may charge 2 to 10 points, meaning 2% to 10% of the loan amount. In some cases, borrowers may also pay points to reduce their interest rate.

Prepayment penalty

Some lenders charge an extra fee if a borrower pays off a loan before the end of the loan term. The prepayment penalty provides the lender with partial compensation for the loss of the revenue they would have received from the borrower’s interest payments. A loan agreement must clearly state the details of a prepayment penalty.

Private money lender

Private lenders aren’t associated with banks, credit unions, or government-sponsored loan programs.

Hard money lenders are private lenders. Unlike a hard money lender in specific, private money lenders may consider both the investment asset and the borrower’s creditworthiness when analyzing a loan application. Private money lenders generally charge lower fees and interest rates than hard money lenders since they take on less risk.

Seasoning

Some lenders will require your funds to be seasoned, which means that the money you use for a down payment (or for liquid reserves requirements) will need to have sat in an account for a minimum amount of time. If, for instance, the funds you plan to use as a down payment just landed in your account last week, a lender may not allow you to get the loan. This is to prevent money earned from criminal activity to be laundered into real estate.

Soft costs

Soft costs are expenses associated with an investment project that do not involve actual physical work or material on the property. These might include permits, taxes, inspections, and professional fees for lawyers and accountants.

Underwriting

Underwriting is the process by which the lender evaluates a loan application, assesses the risk, and determines whether to make the loan. The underwriting process involves a careful review of the property and the proposed project. It’s more involved than a verbal pre-qualification or even a written pre-approval.

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The hard money lenders at Capstone Capital Partners offer loans for various real estate projects, from new construction to fix-and-flip investments. We’ll work hard to ensure you’re a competitive buyer. We’ve funded a combined $500M through our careers – we understand what it takes for investors to be successful in today’s local markets. Getting started is easy. Answer a few questions online and we’ll reach out!

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Hard Money and Private Lending Vocabulary