This glossary contains many of the terms – both technical and slang – that have been used throughout Retire on Real Estate and the R.O.R.E. Companion Guide.
401(k) Plan - A retirement savings plan that is offered by some employers in which employees contribute a certain percentage of their paycheck to be invested in mutual funds and in which the employer often contributes matching funds. See dollar cost averaging and retirement plan.
403(b) Plan – The 401(k)-equivalent retirement savings plan that is available to employees of some public education systems and nonprofit organizations. See 401(k) Plan.
457 or 457(b) Plan – The 401(k)-equivalent retirement savings plan offered by state and local public employers and some nonprofit employers. See 401(k) Plan.
1031 Exchange – Also called a “Like-kind Exchange,” the legal way to not pay taxes on the sale of an investment property as long as the profit from the sale is used to purchase another investment property of equal or greater value.
Active investing for passive income – Doing the work yourself to set up a stream of passive income, such as creating monthly income from owning and/or managing a rental property. The opposite is passively investing.
"All cash" – Real estate jargon meaning that a property is to be purchased with no mortgage or any other loan. Since an all-cash offer is usually stronger in a seller’s eyes than one that requires financing, it can often be lower while still being competitive.
Adjustable Rate Mortgage (ARM) – A high-risk mortgage with payments that are usually lower than a fixed-rate mortgage initially, and after a pre-determined period of time is subject to higher interest rates.
Amortization – Repayment of a mortgage through regular monthly installments of principal and interest for a pre-determined number of years, after which you own the property outright.
Appreciation – The tendency for the value of a property to increase over time. One should view appreciation as a fringe benefit to investing in real estate, but never a guarantee.
Asset (1) – Per the financial planning industry, anything of financial value that can be converted into cash (i.e., stocks and bonds, automobiles, real estate, retirement funds, and savings).
Asset (2) – Per Rich Dad Poor Dad author Robert Kiyosaki, something that provides income on a consistent basis. For example rental property that has positive cash flow is an asset. An asset may be owned with a mortgage or other loan, or it may be owned free and clear. The opposite of an asset is a liability.
Baby Boomer – This term typically refers to those born between the years 1946 and 1964. See also Millennial and Generation X.
Balloon Mortgage – A high-risk mortgage that offers a low interest rate for a fixed period of time, after which the entire balance of the loan is due in full (usually accomplished by refinancing the mortgage or selling the property).
Buyer – The person who submits a contract to a seller for the purchase of a property.
Cash flow – The amount of monthly income provided by a given investment property after accounting for all monthly expenses, including mortgage or other debt used to acquire or leverage the property.
"Chicken" – A metaphor used throughout this book to refer to income producing rental property. Just as a hen produces eggs on an ongoing basis, rental property produces income on an ongoing basis.
Closing – Often used interchangeably with settlement, this is the term given to the final purchase of a property. It is customary for the buyer to sign documents at the office of a title company or real estate attorney. Documents may also be signed online. The seller’s attendance at closing is optional.
Closing costs – Any and all fees that are paid at the time of settlement. Fees can be paid by the buyer and/or the seller, depending on what is agreed upon between both parties and specified in the contract. These can include fees to the attorney, title company, real estate agent, and mortgage broker. They can also include government fees such as recording costs, transfer taxes, property taxes and financing fees such as mortgage application fees, points, and appraisal fees.
Collateral – Property or other assets that a lender of a loan or mortgage has legal permission to seize, through foreclosure, if the borrower fails to make loan payments according to an agreed upon schedule.
Consideration – Anything of value that is given in exchange for a promise. In real estate, this is usually in the form of money held as an earnest money deposit in escrow until settlement. It is provided in tandem with a ratified contract in order for that contract to be legally binding.
Contract – The document that a buyer and seller both must sign for a real estate transaction to be legally binding. A contract must state the nature and terms of the agreement and must include consideration to be legally binding.
Corridor Theory – My theory for how to achieve a large goal in spite of not having all the answers – or even all the questions – in advance. It entails visualizing yourself walking down a long corridor that is sectioned off by multiple doors. You must open each door, as it presents itself, and achieve the challenge behind that door. You are then better prepared to open the next door and traverse the length of the corridor until you reach your goal at the end.
Deposit – The earnest money deposit that a buyer submits with a contract, as consideration, to demonstrate intent to follow through with the purchase a property. This money is usually submitted to and held in escrow by a realtor, title company or real estate attorney until the date of settlement.
Depreciation (1) – The tax-benefit to owning rental property in which you are permitted to deduct from your income tax return the hypothetical wear and tear of the building and its contents at fixed rates.
Depreciation (2) – The term to describe the situation when a property’s value goes down over time, as occurred in the housing market crash of 2007. To safeguard against the risk of depreciating values, when purchasing property it is never wise to speculate and it is always wise to buy for cash flow. Opposite of Appreciation.
Defined benefit plan – See Pension.
Defined contribution plan – A type of employer-sponsored retirement plan in which the employee and/or the employer make contributions to a retirement account on a regular basis, which are to be drawn from in retirement. See Nest Egg and Retirement Plan.
Diversification – Planning for your retirement and/or old age by using a mix of strategies, in order to increase your chances of success and lessen your overall risk.
Dollar cost averaging – The act of putting money into a mutual fund account on a set schedule so that contributions are averaged across both up and down markets. This is in contrast to trying to time the market and also has been popularized as a way to help individual investors save money on a consistent basis.
Down payment – A portion of the total purchase price of a property that a lender may require a borrower to provide from funds other than the mortgage. Down payment funds traditionally come from savings, however they can also come from a 401(k) loan, a HELOC, a retirement account, equity from a refinanced property, a partner, or the seller.
Earnest money deposit – See deposit.
Effective Gross Rent (EGR) – On a prospective rental property, the anticipated rent minus the anticipated loss in income due to vacancy.
Equity – The value of a property minus the total amount owed on the property.
Escrow – The holding of funds by a third party until some specified condition has been fulfilled. The term most commonly refers to the holding of an earnest money deposit by a realtor, title company or real estate attorney until the date of settlement.
Fees (Expense Ratio) – Also called the Annual Operating Expenses or Annual Fund Operating Expenses, the expense ratio is the annual fee that mutual funds charge their shareholders. It expresses the percentage of assets deducted each fiscal year in fees, including 12b-1 fees, management fees, administrative fees, operating costs, and all other asset-based costs incurred by the fund. Portfolio transaction fees, or brokerage costs, as well as initial or deferred sales charges are not included in the expense ratio. The expense ratio accrued on a daily basis reduces the overall rate of return by that amount. See Fees (mutual fund or advisor).
Fees (mutual fund or advisor) – A number of different types of fees that, when taken together, can have a large negative impact on the value of your retirement account over time. For example, fees totaling 2 percent reduce the performance of your account by the same amount, such that an account with a 7 percent return would really only receive a 5 percent return when fees are factored in. See Fees (Expense Ratio).
Financial advisor – See financial planner.
Financial planner – A term used interchangeably for two related, but vastly different, professions: 1) a true investment advisor who is obligated to provide unbiased financial planning advice that is in the client’s best financial interest; and 2) a broker-dealer or salesperson who is required to provide advice that is merely suitable, but not necessarily most suitable for a given client, and who is allowed to provide biased advice without informing clients of their conflicts of interest.
Fixed-rate Mortgage – A mortgage whose interest rate is unchangeable for the entire length of the mortgage (usually 10, 15, 20 and 30 year terms).
Foreclosure – A situation in which a lender seizes a property which has been held as collateral on a mortgage due to the borrower’s inability to make the scheduled principal and interest payments on the mortgage. This involves eviction, repossession and subsequent resale of the property.
Free and clear – The ownership of a property without a mortgage or other loan attached to it.
Generation X – Also called “Gen X,” this term typically refers to those born between approximately 1965 and 1980. See also Millennial, Generation Y, and Baby Boomer.
Generation Y – Synonymous with Millennial. See also Generation X and Baby Boomer.
Heirs – Those who will benefit from your real estate investments and other assets after you die. These usually mean your spouse or partner, your children and/or other loved ones. Heirs could also be taken to mean a charitable organization or religious entity included in your will.
Home Equity Line of Credit (HELOC) – A variable-rate loan that is provided by a lender to a borrower based on a percentage of the borrower’s equity in an existing property. The existing property serves as collateral and may be seized through foreclosure if payments are not made according to an agreed upon schedule.
Individual Retirement Account (IRA) – A retirement savings vehicle that typically includes a mix of stocks, bonds, mutual funds and sometimes REITs and other assets that you must buy at one price and sell at a higher price in order to capture value. Unlike an employer-sponsored retirement plan, the IRA is an investment vehicle that is opened by individuals on their own, rather than by through an employer.
Inflation – The rate at which prices for goods and services are rising, and by extension the rate at which the purchasing power of that country’s currency is falling in a given country’s economy.
Since 1913, when the U.S. Federal Reserve was created and began tracking inflation, the inflation rate in the US has been 3.22 percent on average, translating to prices doubling roughly every thirty years.[i] This means that one dollar in 1913 would have the same purchasing power as $23.93 in 2016 (US Bureau of Labor Statistics online inflation calculator).[ii]
Interest (as related to a mortgage) – The amount charged by a lender to a borrower for a mortgage, expressed as a percentage of the principal.
Interest-only mortgage – A mortgage on a property in which you are only obligated to pay the amount of interest that has accrued each month. Since you are not paying down the principal (unless you make extra payments), this type of mortgage does not improve the amount of equity you have in the property, does not get you closer to owning the property free and clear, does not protect you against the forces of inflation over time, and relies on the less predictable force of appreciation for safety and net gain. Opposite of Fixed-rate Mortgage.
Lease – A legally binding rental agreement which specifies something (ex: a rental property) that is being exchanged for something else (ex: rental payment in the form of money) for a specified period of time.
Lease Option – Also called “Lease with the Option to Purchase” and “Rent-to-Own,” this is a type of rental agreement that gives a tenant/buyer the option to purchase a rented property within a specified period of time. This type of agreement is used in both residential and commercial real estate purchases.
Lease/sublet – The strategic move in which one rents a property from a property owner and then, with the owner’s permission, rents the property out to a new tenant or group of tenants, collecting the difference between the rent paid and the rent received as a monthly fee.
Leverage – The ability to acquire and eventually own outright an otherwise unaffordable property through the tool of a mortgage.
Liability – Something that costs you money on a consistent basis without providing any monetary gain in return. For example, consumer debt and rental property with negative cash flow are liabilities. The opposite of a liability is an asset.
Matching – The funds that an employer contributes to an employee’s 401(k) retirement account or other employer sponsored retirement account.
Millennial – Also called Generation Y, this term typically refers to those born between approximately 1980 and the early 2000’s. See also Generation X and Baby Boomer.
Mortgage – A method of purchasing real estate by borrowing money from a bank or other lender with the property being purchased as collateral. The borrower is obligated to pay back the mortgage according to certain terms until it is eventually owned free and clear. If the borrower fails in this obligation, the lender can foreclose and take ownership of the property as REO.
Mutual fund – An investment vehicle in which your money is pooled with that of many other investors and invested by a money manager across a number of different stocks and/or bonds in hopes that the funds will go up in value over time. This can be a retirement account but is not necessarily limited to retirement accounts.
Negative Cash Flow – The undesirable cash flow situation that occurs when the sum of the monthly expenses (including mortgage or other debt) on a property is greater than the monthly income for that property.
Nest egg – A lump sum of money that an individual builds up over his or her lifetime and sets aside, usually in some type of retirement account to be drawn down from later, in retirement. See Retirement Plan and Defined Contribution Plan.
Net Operating Income (NOI) – The term given to the cash flow on a property before accounting for the principal and interest portion of a monthly mortgage payment.
Net Worth – The sum of all your assets minus the sum of all your liabilities.
Offer – A proposition to purchase a property that a hopeful buyer submits to the property’s owner in the form of a contract.
Owner financing – See seller financing.
Passive income – Income received on a consistent, regular basis with little effort to maintain it, for example rental income earned on a monthly basis.
Passive investing – The act of turning your money over to a financial advisor, mutual fund, or other retirement account either on a one-time or consistent basis, and rarely thinking about it again.
"Pay yourself first" – Lingo in the personal finance world that implies having money automatically deducted from your paychecks in a “dollar-cost averaging” way and deposited into your retirement accounts before you have a chance to spend it on anything else.
Payback Period – The payback period is the length of time required to recover the cost of an investment.
Pension – More formally known as a “defined benefit plan,” this is the gradually disappearing system in which employers pay their retired workers monthly income for life, the amount of which is usually based on length of service and final salary.
PITI – The acronym for “Principal, Interest, Taxes and Insurance” refers to the four components of a monthly mortgage payment.
Points – The percentage of a total loan or mortgage amount that you pay at the time of closing in exchange for a lower interest rate on that mortgage, with one point being equal to one percent, two points being two percent, etc.
Ponzi Scheme – The phony investment of other people’s money, with false claims of strong returns and the constant recruitment of new clients’ money to pay fictitious returns to existing investors for the false appearance of authenticity.
Positive Cash Flow – The desirable cash flow situation that occurs when the monthly income is greater than sum of the monthly expenses (including mortgage and/or other debt).
Primary Residence Exclusion – Provision in the tax code allowing homeowners to avoid paying taxes on the capital gains from the sale of their home as long as they lived in their home for at least two of the five years immediately preceding the sale.
Principal (1) – The portion of your monthly mortgage PITI payment that goes toward paying down the overall principal (2).
Principal (2) – The total amount owed on your mortgage. As you make payments, this number will gradually decline until it is ultimately paid off and you own the property free and clear.
Property – A house, building, condominium, or piece of land owned by someone, usually with rental potential and tax obligations.
Property management (by you) – Management of someone else’s property by you (not recommended unless you are a licensed professional property manager).
Property management (for you) – Management of property by a licensed professional property manager, to include all aspects of securing and retaining tenants, collecting rent, and overseeing maintenance and repair issues of the property.
Purchase Price – The bottom line amount that the seller will receive for the sale of a property from the buyer and the buyer’s lender(s).
Ratified – The status of a contract in which it is legally binding because it has been signed by all parties.
Recession – A significant decline in the economy lasting longer than a few months.
REIT (Real Estate Investment Trust) – A company that invests in real estate through property and/or mortgages and often trades shares, similar to a stock or mutual fund, on major stock exchanges. They offer investors an extremely liquid way of investing in real estate but must be sold higher than the original purchase price in order to capture value.
Rent-to-Own – See Lease Option.
"REO" (Real Estate Owned) – After foreclosure and the unsuccessful attempt by the bank to sell a property at auction (due to the amount owed being greater than value), the ownership of a property by a bank.
Required Minimum Distribution (RMD) – The legal requirement in the United States that individuals withdraw a certain minimum sum of money each year from their retirement accounts beginning at age 70½. RMD applies to all employer sponsored retirement plans and IRA-like plans except for the Roth IRA.
Retirement – The period of one’s life in which one no longer exchanges time for money in the form of work.
Retirement Plan – The term usually used to refer to an employer sponsored 401(k), 403(b), 457, or governmental TSP retirement plan or a self-sponsored Individual Retirement Account (IRA) or self-employed 401(k) plan that is typically invested in stocks and/or bonds in the form of a mutual fund. See Retirement Plan (Roth), Retirement Plan (Non-Roth or Traditional), Defined Contribution Plan, and Nest Egg.
Retirement Plan (Roth) – A retirement plan that is not tax deductible during the year invested, but comes with the advantage of having earnings that are free from being taxed at time of withdrawal as long as the beneficiary is at least age 59½.
Retirement Plan (Non-Roth or Traditional) –A retirement plan that is tax deductible for certain individuals (depending on income and whether the individual or his or her spouse has the option of a investing in a Roth retirement account through work) during the year invested, however – unlike the Roth products – the earnings are subject to income tax at time of withdrawal at age 59½ or greater.
Risk – The chance things will not go as expected or the likelihood of losing money.
Return on Investment (ROI) – A measure used to evaluate the real or projected performance of an investment or to compare two or more different investments. It is equal to your total annual cash flow (income minus expenses) divided by the amount you personally invested to purchase the asset. The less you invest out of your own pocket, the higher your ROI.
Roth – See Retirement Account (Roth).
Second mortgage – An additional mortgage on a property, also referred to as a home equity loan or home equity line of credit. Failure to pay can trigger foreclosure proceedings. A second mortgage is subordinate to the primary mortgage, meaning that in the case of default, the first mortgage gets paid off first before the second.
Self-directed IRA (Roth and non-Roth) – The investment vehicle in which you are the manager and you have the ability to invest your money in both the stock market, index and mutual funds, and real estate, precious metals (silver, gold, platinum), oil, restaurants, a startup companies, and interest-bearing loans. See also Individual Retirement Account (IRA) and self-directed Solo 401(k).
Self-directed Solo 401(k) – An investment vehicle that is similar to the self-directed IRA (Roth and non-Roth), but with slightly different rules.
Seller – The person or party who is selling a property.
Seller financing – The situation in which – like a bank – the seller of a property lends money to the buyer, and the buyer pays this money back at an agreed upon interest rate over an agreed upon period of time. This money can either be used for a portion or entirety of the purchase price of the property. Also called owner financing.
Settlement – Often used interchangeably with closing, this is the term given to the final purchase of a property. At this time, it is customary for the buyer to sign documents at the office of a title company or real estate attorney. Documents may also be signed online. The seller’s attendance at closing is optional; many sellers opt to sign papers prior to the actual closing date.
Special Assessment Fees (related to a condominium) – Fees that a condominium homeowner’s association charges unit-owners to cover the cost of building repair or upgrades that exceed that amount in the current budget.
Speculation – The practice of purchasing property (or land, stocks, gold, silver, etc.) with the sole expectation that property values will appreciate. It is always safest to buy properties that provide positive cash flow in the near- and long-terms.
Stock market – The place where stocks and bonds are bought and sold, or “traded” in the form of stock market investing.
Stock market investing – The risk-laden practice of purchasing stocks and bonds at one price, with the goal of later selling at a higher price.
Tenant – Someone who pays rent to a landlord or property manager in exchange for space in which to live or conduct business.
Tenant/Buyer – The individual in a Rent-to-Own agreement who is under contract to rent a property with the option of purchasing it within an agreed upon period of time.
Term – The length of time until a mortgage or loan is fully repaid.
Thermostat Change and Results Theory – My theory that we have daily habits that keep us at a given state of being, or “temperature,” in various areas of life (finances, weight, clutter, etc.), until we positively or negatively change our “thermostat setting” by changing some element of our behavior on a consistent or even daily basis, which then results in our landing at our new setting or state of being.
Title company – A business that ensures that a property’s title has no liens (outstanding financial obligations) and is otherwise legitimate, issues title insurance to protect the lender, maintains escrow accounts, conducts settlement of the sale of a property, and files all paperwork with the appropriate governmental entities.
"Turn key" – The term used to classify a home that is for sale that is nice enough to occupy without any additional work. Synonymous with the term “move-in ready.”
Vacancy – The period of time in which a property is not rented and there is a loss of revenue. In estimating expenses, you must include an estimated vacancy rate. Investors often use 5 percent, however this may vary depending on your specific property and location.
Value – The amount of money someone would actually pay for a property, given the value of comparable homes (i.e., “comps") or given the net operating income on the property.
Wall Street – The informal way of referring to the stock market.