Investor glossary

Multifamily terms and definitions

Whether you're an experienced multifamily investor or getting ready to buy your first apartment building, here are the key terms and definitions to know.

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Property & Market Basics

11 terms

Cap Rate

A cap rate measures a property's rate of return for a single year without taking into account debt on the asset.

Cash Flow

The money left over after collecting income and paying all operating expenses and debt payments. Our rule: buy for cash flow and pay market price.

Door (Unit)

Industry term used instead of unit.

Economic Vacancy

The percentage of income not being collected against market rents. Includes vacancy, bad debt and non-payment, and actual rents vs. market rents.

NOI (Net Operating Income)

A property's income minus its operating expenses, before debt payments.

Primary Market

5 million or more people, but you also need to look at investment activity. For example, Detroit has more than 5 million people but low investment activity, so it's considered a secondary market.

Secondary Market

2 to 5 million people, but you also need to look at investment activity. For example, Austin has been considered a secondary market due to its investment activity, even with a smaller population.

Tertiary Market

Fewer than 2 million people.

Principal Paydown

We call this our “personal piggy bank.” Every month when your tenants pay rent, they pay off a portion of the financing used to purchase the property, creating additional equity as they pay down your loan.

Principal Protection

Multifamily properties generate cash flow and are typically covered by hazard insurance, which can include coverage for lost income if disaster hits.

Working Capital

Funds set aside for future capital items. Rule of thumb: 1 month of rents.

Deal & Transaction Terms

13 terms

Best & Final

A process where a seller narrows buyers down to a smaller group and asks them to submit their best and final offer.

BOV (Broker Opinion of Value)

What a broker provides to a seller when the broker is trying to get the listing to sell the property.

DD (Due Diligence)

Inspecting the property's exterior and interior to determine its condition and deferred maintenance. Also includes a lease audit.

Deferred Maintenance (DM)

Required maintenance that the current owner has not performed.

Disposition

Disposing of, or selling, a property.

Hard Money

Money the seller keeps if you walk away from a deal. Money can go hard at the time of contract, after due diligence, or at any other time agreed upon.

LOI (Letter of Intent)

A non-binding offer to purchase, usually 1 or 2 pages with the key terms.

OM (Offering Memorandum)

The broker's document describing the property.

Property Traded For

Term used to describe what a property sold for.

PSA (Purchase and Sale Agreement)

The contract between the buyer and seller.

Re-trade

After due diligence, the buyer goes back to the seller asking for items to be fixed and/or a credit to fix deferred maintenance.

Reversion Cap Rate

The cap rate you expect at the time you sell the property.

Proof of Funds

Account statements (excluding retirement accounts) showing the liquidity to close the deal.

Financing & Loan Terms

11 terms

Amortization Period

The number of years it will take to repay the loan, typically 20 to 30 years.

Capital Cost

Costs that can be capitalized over a number of years for tax purposes. Example: replacing an AC unit.

Guarantor

Signs on the loan, but has no equity.

KP (Key Principal)

Signs on the loan and has equity.

Leverage

Using other people's money, such as a loan.

Maintenance Expenses

Costs that are expensed for tax purposes. Example: fixing an AC unit.

Recourse vs. Non-Recourse Loan

Recourse: you're personally liable. Non-recourse: you're not personally liable.

Yield Maintenance

A prepayment penalty that, if the borrower pays off a loan before maturity, lets the lender earn the same yield as if all scheduled payments had been made until maturity.

ABP (All Bills Paid)

The property pays for all utilities.

RUBS (Ratio Utility Billing System)

Billing tenants back for utilities.

Risk Fee

A fee charged to a tenant with a lower credit score.

Syndication & Investing Structure

7 terms

JV (Joint Venture)

Sponsoring a deal with one or more other people.

OA (Operating Agreement)

Most deals are set up as an LLC. The operating agreement governs how the LLC's business will be run.

PPM (Private Placement Memorandum)

The private offering document used to raise money from investors.

SA (Subscription Agreement)

An investor's application to join the LLC or limited partnership that owns the real estate.

Syndication

A sponsor raises funds from a group of investors to buy a property.

LURA (Land Use Restriction Agreement)

Applies when an owner received tax credits for a property, which limits how much a tenant can earn to qualify. These properties can be harder to sell.

PFS (Personal Financial Statement)

A summary of your assets, liabilities, and net worth.

Brokers & Representation

3 terms

Asset Manager

Manages the property management company. The fee is typically 1.5% to 2%.

Buyer Broker

A broker representing the buyer.

Listing Broker

The broker who has the property listed.

Financial Analysis & Reporting

5 terms

Pro Forma / Underwriting

Industry term for financially analyzing investment real estate.

RR (Rent Roll)

Lists all tenants, their lease amounts, and lease start and end dates.

T12

Trailing 12 months profit and loss (P&L).

T3

Trailing 3 months profit and loss (P&L).

Tax Benefits

Multifamily real estate can offer significant tax advantages that create “tax-advantaged income.” Through depreciation, 1031 exchanges, and self-directed IRAs, it can receive some of the most favorable tax treatment of any asset class.

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