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Investor terms defined.
I’m Eddie Weir, Houston REALTOR® with REMAX in Greater Houston. Investor real estate has its own vocabulary — financing types, return metrics, ownership structures, tax mechanisms — and a buyer-side glossary doesn’t cover most of it. This is the A–Z reference every Houston investor should keep open during underwriting, plus 12 featured terms with the context that actually matters when the deal is in front of you.
Why a Separate Investor Glossary
Investor Vocabulary Isn’t Buyer Vocabulary
A first-time Houston buyer needs to know what an option period is, what earnest money means, and how a TREC contract works. A Houston investor needs all of that plus a second layer: DSCR ratios, cap rates, 1031 timelines, LLC ownership, BRRRR mechanics, and which Texas tax treatments apply to non-owner-occupied property. Mixing both into one glossary makes both worse. So this is the investor side.
12 Featured Terms
The Twelve Most Important.
The terms below come up on almost every Houston investor deal. If you only read part of this glossary, read these.
Financing
DSCR Loan (Debt Service Coverage Ratio)Investor loan underwritten on the property’s projected rental income, not the borrower’s W-2. Deal qualifies if rents cover debt service plus a margin (typically 1.0–1.25 DSCR). LLC title accepted; no personal income docs required. Most popular financing for Houston buy-and-hold investors building a portfolio.
Strategy
BRRRRBuy, Rehab, Rent, Refinance, Repeat. Investor buys a distressed Houston property with hard money or cash, rehabs it, places a tenant, refinances based on the new appraised value (ARV), and pulls most of the original capital back out to deploy on the next deal. Compounds capital efficiency.
Financing
Hard Money LoanShort-term, asset-based loan backed by the property itself. Fast close (7–30 days), short duration (typically 6–18 months), higher rate, higher fees. Used in Houston BRRRR and fix-and-flip strategies where speed beats cost. Refinanced into a conventional or DSCR loan once the property is stabilized.
Metric
Cap Rate (Capitalization Rate)Net Operating Income divided by purchase price, expressed as a percentage. The fundamental valuation metric for income-producing real estate. Houston cap rates vary dramatically by neighborhood, property class, and condition. Higher cap rate = better cash flow; lower cap rate = stronger appreciation potential or premium location.
Metric
Cash-on-Cash ReturnAnnual pre-tax cash flow divided by total cash invested (down payment + closing costs + rehab). The most useful metric for leveraged investors because it accounts for financing. A Houston buy-and-hold targeting 8–12% cash-on-cash is competitive; 12%+ is strong; 6%–8% is acceptable in appreciation-heavy submarkets.
Tax
1031 Exchange (Section 1031)IRS provision allowing investors to defer capital gains tax by rolling proceeds from a sold investment property into a like-kind replacement property within strict timelines: 45 days to identify, 180 days to close. Texas has no state income tax, so 1031 is purely a federal-tax deferral here. Coordinate with a Qualified Intermediary before closing on the relinquished property — no retroactive option.
Texas Tax
Texas Homestead ExemptionTexas property tax exemption that reduces the appraised value of a primary residence for tax purposes. Does NOT apply to investment properties. Investor purchases pay the full Houston-area effective tax rate (one of the highest in the country). Plan for the full tax burden in your underwriting from day one.
Texas Tax
MUD Tax (Municipal Utility District)Additional property tax levied by special districts that fund infrastructure (water, sewer, drainage) outside Houston city limits. Common in Cypress, Katy, parts of Spring, and parts of Fort Bend County. MUD rates can add 0.5–1.5% to your effective property tax rate. Always check the deed and HCAD record for MUD before underwriting a Houston-area suburban property.
Metric
NOI (Net Operating Income)Gross rental income minus operating expenses (taxes, insurance, property management, repairs, vacancy reserves) — but BEFORE debt service and capital expenditures. The denominator for cap rate and the foundation of every investor underwriting model. NOI must be calculated honestly: undercounted expenses is the most common Houston investor underwriting mistake I see.
Financing
LTV (Loan-to-Value)Loan amount divided by property value, expressed as a percentage. A 75% LTV on a $300K Houston property = $225K loan, $75K down. Investor LTVs are stricter than primary-residence LTVs: conventional investment typically 75–80% LTV (15–25% down), DSCR 75–80%, hard money 60–75% (30–40% down). Higher down = lower rate.
Strategy
ARV (After Repair Value)The projected market value of a property AFTER planned renovations are complete. Critical for BRRRR and fix-and-flip strategies because the refinance or resale price is based on ARV, not the distressed purchase price. Houston ARV estimates should be supported by recent comparable sales in the same submarket and condition tier — not by hope.
Ownership
LLC Title (Limited Liability Company)Holding investment property in an LLC instead of personal name provides liability protection, clean ownership entity for taxes and bookkeeping, and separation from personal assets. DSCR loans practically require it. Conventional investment loans accept LLC title but usually require a personal guarantee. Texas LLC formation is fast and inexpensive ($300 filing fee).
A–Z Investor Reference
The Full Glossary
Jump to a letter or scroll. Every term below is one I’ve used or heard during a Houston investor transaction in the last several years.
A
An investor who materially participates in the operation of an investment property — making management decisions, handling tenant relations, etc. Distinct from passive investor (e.g., LP in a syndication). Tax treatment differs.
Rent estimate that accounts for size differences between a comp and your subject property. Rent per square foot doesn’t scale linearly — the 0.55 elasticity rule says for every 10% more sqft above the comp, rent goes up only ~5.5%. Without this adjustment, larger Houston homes get systematically overestimated rent and end up with surprise negative cash flow.
The increase in property value over time, independent of cash flow. Greater Houston has historically delivered appreciation in line with or above national averages, with submarket variation.
Projected market value after planned renovations. Foundation of BRRRR and fix-and-flip underwriting.
Transferring rights to a real estate purchase contract to another buyer (often a wholesaler’s sale to an end-buyer investor). Texas requires specific disclosure on assignment transactions.
B
Tax provision allowing accelerated depreciation on certain components of an investment property (typically those reclassified through cost segregation: appliances, carpeting, landscaping, HVAC, etc.). Combined with cost segregation, can generate $30K–$50K in year-1 deductions on a $400K Houston property. Schedule and percentage have changed several times under recent tax law — consult a real estate CPA for the current year’s election.
Short-term financing used to bridge the gap between buying a new property and selling an existing one, or between purchase and long-term refinance. Higher rate, fast close.
Buy, Rehab, Rent, Refinance, Repeat. Investor strategy that pulls capital back out via cash-out refinance after stabilization. See featured term above.
Strategy of purchasing a Houston rental, placing a tenant, and holding long-term for cash flow plus appreciation. Most common Houston investor strategy.
An investor’s defined criteria for an acceptable deal: price range, ZIP, property type, condition tier, target metrics. A clear buy box accelerates deal flow and reduces wasted touring.
C
NOI divided by purchase price. Fundamental income-property valuation metric. See featured term above.
Net income from a rental property after debt service, expenses, taxes, insurance, and reserves. Positive cash flow = property pays for itself plus margin; negative cash flow = property requires owner to subsidize each month.
Annual pre-tax cash flow divided by total cash invested. The most useful return metric for leveraged investors. See featured term above.
Title insurance, escrow fees, appraisal, lender fees, recording fees, prorated property taxes, and any HOA or transfer fees. Investor closing costs typically run 2–4% of purchase price; varies by lender and loan type.
Analysis of recent comparable sales used to estimate market value. Investor CMA emphasizes condition tier, rent comps, and submarket trend — not just sale price.
Financing for properties with 5+ residential units or non-residential use. Different underwriting standards from residential investment loans (1–4 units).
Standard Fannie Mae / Freddie Mac investment-property loan. Best rates of investor products, typically 15–25% down, capped at 10 financed properties before lenders push to portfolio loans.
Engineering analysis that reclassifies portions of a property’s value into shorter depreciation schedules — appliances and carpeting at 5 years, landscaping at 15 years — instead of all 27.5 years for residential rental. A study runs $2K–$4K and typically generates $30K–$50K in year-1 accelerated deductions on a $400K Houston property. Most valuable for high-income investors at 24%+ tax brackets.
D
The total annual mortgage payment (principal + interest, sometimes including taxes and insurance). The denominator in DSCR calculations.
IRS deduction allowing investors to deduct a portion of the property’s value (excluding land) annually as a non-cash expense. Residential rental property depreciates over 27.5 years; commercial over 39 years. Reduces taxable rental income.
Property NOI divided by annual debt service. Most DSCR loans require 1.0–1.25 minimum. See featured term above.
The investor’s pre-close inspection and analysis period: physical inspections, title review, lease review (if tenanted), rent-roll verification, and final underwriting confirmation.
Non-owner-occupied investment loans typically require 15–25% conventional, 20–30% non-QM, 30–40% hard money. Higher down = lower rate, lower payment, higher cash-on-cash.
E
Good-faith deposit held by the title company at contract execution. Texas-specific: distinct from option fee.
The portion of property value owned by the investor (current market value minus outstanding loan balance). Builds through appreciation, principal paydown, and value-add improvements.
Neutral third-party holding of funds, documents, or both during a transaction. Houston-area title companies handle escrow on most investor closings.
F
Federal Emergency Management Agency designation for a property’s flood risk. Critical Houston consideration: post-Harvey and Imelda, flood zones materially affect insurance cost and resale liquidity. Always pull the elevation certificate.
Buy a distressed Houston property, renovate it, and sell to a retail buyer for profit. Short hold (3–9 months typical), tax treated as ordinary income, often financed with hard money.
The price a willing buyer would pay a willing seller in an arm’s-length transaction. Investors underwrite to FMV, not asking price.
G
Total rental income minus vacancy and credit loss reserves. The starting point for NOI calculations.
Purchase price divided by annual gross rent. A quick-screen metric (lower = better) for comparing Houston rental properties before deeper underwriting.
H
Short-term, asset-based loan for fast-close investor deals. See featured term above.
The taxing authority that assesses property value for Harris County. Investors should pull the HCAD record on every Houston deal under contract: assessed value, tax rate, MUD/PID overlays, and prior-year tax payment status.
The carrying costs incurred during a fix-and-flip or rehab: mortgage interest, property tax, insurance, utilities, HOA dues. Holding costs accrue daily and erode flip profit if the project runs long.
Owner-occupying part of a multi-unit property while renting out the other unit(s). Qualifies for primary-residence financing (lower down, better rates) while generating rental income.
I
The five wealth drivers in real estate: Income (cash flow), Depreciation (tax shelter), Equity paydown (tenant retiring your loan), Appreciation (value growth), Leverage (controlling a large asset with a small down). Cash-on-cash return only captures Income — about 20–30% of the actual return. The other four drivers create the rest. Foundation of every honest Houston pro forma.
Loan structure where the borrower pays interest only (no principal) for an initial period. Common in DSCR programs to maximize cash flow during stabilization.
Real estate purchased with the intent of generating income, capital appreciation, or both. Treated differently from primary residence for financing, taxes, and Texas homestead protection.
The annualized rate of return that accounts for both cash flow and appreciation over the full hold period. More sophisticated than cap rate or cash-on-cash; standard in syndications and longer-hold investor analysis.
J
Partnership between two or more investors on a single property or deal. Each party contributes capital, expertise, or both. Document via JV agreement before closing.
L
Tenant rents the property with an option to purchase at a predetermined price within a set window. Less common in Houston investor practice but appears occasionally.
Use of borrowed money to amplify returns (and risk). The fundamental advantage of real estate vs. cash investments: $50K down on a $250K rental controls $250K of asset.
Texas business entity commonly used to hold investor properties for liability protection and tax / bookkeeping clarity. See featured term above.
Standard 12-month lease structure. Most stable Houston rental cash flow; subject to Texas Property Code Chapter 92.
Loan amount divided by property value. See featured term above.
M
The rent a property could currently command if listed today. Distinct from in-place rent (what the current tenant pays). Investors underwrite on market rent, not in-place rent, when modeling future cash flow.
The legal document evidencing the loan and the borrower’s obligation to repay. Sometimes traded as an investment in itself (note investing).
Texas special district that funds infrastructure outside city limits. Adds to property tax bill. See featured term above.
N
Gross income minus operating expenses, before debt service. Foundation of cap rate. See featured term above.
Property owned but not lived in by the owner. Triggers different financing rules, higher interest rates, and different tax treatment than primary residence.
Non-Qualified Mortgage. Loans for borrowers who don’t fit the conventional Fannie/Freddie box: self-employed, complex tax returns, multiple existing properties, recent credit events. Bank-statement, asset-depletion, and P&L programs all live under non-QM.
O
Property sold without being publicly listed on the MLS. Sourced through wholesalers, direct-to-seller marketing, or agent networks. Houston has an active off-market deal flow.
Recurring property costs: taxes, insurance, property management, repairs, vacancy reserves, utilities (if owner-paid). Used to calculate NOI.
Texas-specific: non-refundable fee paid to the seller for the right to terminate during the option period. Applies to investor purchases the same as primary-residence purchases.
7- to 10-day Texas-specific window after contract execution during which the buyer can terminate for any reason. Investor due diligence happens here.
P
Like MUD, a Texas special district that levies additional property tax for infrastructure and amenities. Common in Houston master-planned communities. Always check.
Insurance required on conventional loans with less than 20% down. Doesn’t typically apply to investor loans (which have higher down requirements).
Lender’s in-house loan held on their books rather than sold to Fannie/Freddie. Used by investors with 10+ financed properties or unusual circumstances. More flexible underwriting; usually higher rates.
Investor pre-approval looks different from primary-residence: DSCR underwrites the property, hard money underwrites the borrower’s track record, conventional investment looks like a mortgage with non-owner-occupied flags.
Third-party service handling tenant relations, rent collection, maintenance, and turnover. Houston PM fees typically 8–10% of monthly rent plus leasing fees.
Q
Loan meeting CFPB ability-to-repay standards (debt-to-income limits, no negative amortization, etc.). Conventional and most government loans are QM. Investor non-QM loans intentionally fall outside this category.
The neutral third party required to facilitate a 1031 exchange. Must be engaged BEFORE the sale of the relinquished property closes.
R
IRS designation that allows rental losses (including depreciation) to offset active income (W-2 wages, agent commissions, spouse’s income) without passive activity loss limitations. Two-prong test: 750+ hours per year materially participating in real estate trades or businesses, AND more than 50% of total personal services hours in real estate. Licensed agents working full-time typically pass both tests. Game-changer for tax-efficient income; documentation matters and the IRS audits these claims. Always consult a real estate CPA before electing REP.
Replacing an existing mortgage with a new one. Cash-out refinance pulls equity out as a lump sum (BRRRR mechanism). Rate-and-term refinance lowers the rate or changes the term without taking cash out.
Document listing all current tenants, lease terms, rent amounts, security deposits, and lease end dates. Critical due diligence document on tenanted purchases.
General term for the percentage return on capital invested. Investors typically use cap rate, cash-on-cash, or IRR rather than generic ROI for property analysis.
S
IRS provision for tax-deferred exchanges. See featured term “1031 Exchange” above.
IRA structure that allows real estate investments inside the retirement account. Specific rules apply; cannot be used for owner-occupied or family-occupied property.
Property rented for stays of less than 30 days (Airbnb / VRBO model). Houston is one of the more permissive major Texas markets, but rules vary by HOA, neighborhood, and city ordinance. Always verify before underwriting on STR economics.
Tax mechanism where heirs inherit a property at its current market value — not at the original owner’s purchase price. All deferred capital gains accumulated during the original owner’s life disappear at death. Heirs can sell immediately with no tax owed. Combined with 1031 exchanges over a lifetime, this is one of the most powerful wealth-transfer tools in the U.S. tax code. Decades of tax-free compounding pass to the next generation.
Texas-specific survey or affidavit confirming the existing survey is accurate. Required by most Texas lenders on closing.
Group investment where one party (sponsor / GP) sources and operates a deal, and other parties (LPs) provide passive capital. Common for larger Houston commercial or multi-family deals.
T
Background, credit, employment, and rental-history check before signing a lease. Texas Fair Housing rules apply; consistent screening criteria across all applicants is required.
Property tax exemption for primary residences only. NOT applicable to investment properties. See featured term above.
Insurance protecting the buyer (and the lender, separately) against title defects discovered after closing. Owner’s title policy is optional but strongly recommended on Texas investor purchases.
State agency regulating Texas real estate licensees and contracts. The TREC residential contract is the standard form for most Houston transactions, including investor purchases of 1–4 unit residential properties.
The full year-1 wealth picture across all five IDEAL drivers: cash flow + equity paydown + appreciation + tax savings. Honest measure of what an investor’s wealth actually grows by — often 4× to 8× the cash-on-cash return on the same property. A Houston rental showing −$96 cash flow can produce ~$13,200 in year-1 wealth gain (~22% True Return on $60K cash invested) once all five drivers are counted. Equity paydown and appreciation are unrealized until sale, refinance, or 1031 exchange — but they are real and they compound.
Investor property sold ready-to-rent or already tenanted, requiring no rehab. Premium price reflects the saved time and risk; lower cap rate typically.
U
The lender’s analysis of borrower creditworthiness, property value, and deal economics to decide loan approval. Investor underwriting examines the property cash flow alongside (or instead of) personal income.
V
The percentage of time a unit is unoccupied during a year. Houston buy-and-hold underwriting typically assumes 5–10% vacancy reserves depending on submarket and property class.
Investor strategy of buying an underperforming property, improving operations or condition, and capturing the value increase. BRRRR is a value-add strategy; turnkey is not.
W
Sourcing distressed off-market Houston properties under contract and assigning the contract to an end-buyer for an assignment fee. Operates in a gray area of Texas real estate licensing law — consult counsel before engaging in wholesaling activity.
Y
General term for return on investment. Real estate investors usually express yield as cap rate, cash-on-cash return, or rental yield (annual rent ÷ property value).
Z
Local rules governing land use. Houston is famously the largest U.S. city without traditional zoning — deed restrictions and HOA covenants serve a similar function. Always check both before a Houston investor purchase, especially for short-term rental or duplex/multi-unit conversions.
Houston Investor Glossary FAQ
Common Questions About Investor Vocabulary
What’s the difference between a DSCR loan and a conventional investment loan?
A conventional investment loan underwrites the borrower’s personal income, debt-to-income ratio, and credit score — the borrower has to qualify personally. A DSCR loan underwrites the property’s projected rental income against the proposed debt service — the property has to qualify, not the borrower’s W-2. DSCR is faster for self-employed investors and easier when scaling beyond 4–10 properties; conventional has better rates if you fit the box.
What’s a good cap rate for Houston investment properties?
It depends entirely on submarket, property class, and your strategy. As a rough orientation: 5–6% cap rates in premium Inner Loop areas (compensated by appreciation), 6–8% in mid-tier Houston suburbs, 8–10%+ in higher-yield C-class properties. Don’t chase cap rate alone — a 12% cap rate in a deteriorating submarket can underperform a 6% cap rate in an appreciating one. Always model total return, not just cap rate.
Can I house-hack in Texas?
Yes. Buying a 2–4 unit Houston property, living in one unit, and renting the others qualifies for owner-occupied conventional, FHA, or VA financing — meaning lower down payment and better rate than a pure investor loan. House hacking is one of the most efficient ways to start a Houston rental portfolio.
What does Texas homestead exemption do for investors?
Nothing — that’s the point. Texas homestead protections (both the property tax exemption and the constitutional protection from creditors) apply only to your primary residence. Investment properties pay full Houston-area property taxes (one of the highest effective rates in the country) and don’t get the homestead creditor protection. Both factors must be in your underwriting from day one.
How do I find off-market Houston investment deals?
Three channels: (1) wholesalers who source distressed properties and assign contracts; (2) direct-to-seller marketing — postcards, cold calls, online ads targeting absentee owners or distressed situations; (3) agent networks — some Houston agents have pocket listings or pre-MLS deals they share with investor clients. Each path has different cost, time, and risk profiles.
Should I close in an LLC or my personal name?
For investment property, LLC is the better default for liability separation, tax/bookkeeping clarity, and professional structure. DSCR loans practically require it. Conventional investment loans accept LLC title but usually require a personal guarantee. Texas LLC formation is fast ($300, online) and inexpensive. The exception: if you’re house-hacking or planning to convert to primary residence, personal title makes more sense for owner-occupied financing.
What’s the difference between BRRRR and fix-and-flip?
Both involve buying distressed and renovating. BRRRR ends with renting and refinancing — you keep the property long-term and pull most of your capital out for the next deal. Fix-and-flip ends with selling to a retail buyer for profit. BRRRR builds a portfolio over time; fix-and-flip generates lump-sum profit (taxed as ordinary income) on a shorter timeline. Different risk profiles, different tax treatments, different exit strategies.
Can I 1031 exchange a Houston property into another state?
Yes. The 1031 exchange rules are federal — like-kind property includes any U.S. real estate held for investment, regardless of state. You can exchange a Houston rental into a property in any state. Texas’s lack of state income tax means there’s no state-level deferral, just federal. The 45-day identification window and 180-day closing window apply regardless of where the replacement property is located.
Expanded glossary — 50 more terms
Investor terms beyond the basics.
These are the underwriting, tax, and structuring terms that come up once a Houston investor moves past the first deal. Alphabetized for reference; skip to the term needed.
After Repair Value (ARV)
The market value a property is expected to reach after planned renovations are complete. The number BRRRR strategy is built on — conservative ARV math protects the refinance step from disappointment.
ARV LTV
A rehab loan structured as a percentage of After Repair Value rather than the current as-is value. Allows higher leverage during rehab. Common in fix-and-flip and BRRRR financing.
Bonus Depreciation
IRS provision allowing investors to depreciate certain qualifying property components in the first year of ownership rather than over their full useful life. Combined with a cost segregation study, can produce substantial first-year tax shelter.
Boot
In a 1031 exchange, any non-like-kind property received (cash, debt reduction, mortgage paid off in excess of the new loan). Boot is taxable in the year of the exchange. Pure-deferral exchanges have zero boot.
Break-Even Ratio
Operating expenses plus debt service divided by gross potential income. The vacancy rate at which the property exactly breaks even. Lower is better; under 80% is healthy; over 95% is fragile.
Cap Rate (Capitalization Rate)
Net Operating Income divided by purchase price. The unlevered annual return the property would generate if bought all-cash. Different submarkets and asset classes have different prevailing cap rate ranges.
Cap-Ex (Capital Expenditure)
Spending on long-life property components — roof, HVAC, water heater, structural work, kitchens, baths. Distinct from operating expenses, which are recurring smaller costs. Cap-Ex is depreciated; operating expense is deducted in the year incurred.
Capex Reserve
Money set aside in operating budget for future capital expenditures. Typical reserve: 5–10% of gross rent annually. Investors who skip this line are pretending capex doesn’t exist until the roof needs replacing.
Cash Flow
Net Operating Income minus debt service. The actual money in the investor’s pocket each month after all expenses including the mortgage. Honest cash-flow math subtracts capex reserve, vacancy reserve, and management cost.
Cash-on-Cash Return (CoC)
Annual cash flow divided by total cash invested (down payment, closing costs, rehab). The leveraged return on the actual capital the investor put in. Different from cap rate — cap rate ignores financing; CoC measures leveraged performance.
Class A / B / C / D Properties
Loose industry classification. Class A = newest, highest-rent, lowest cap rate, stable tenants. B = solid mid-tier. C = older, more turnover, higher cap rate. D = high-risk, often distressed. Greater Houston has examples of all four.
Cost Segregation Study
Engineering-based analysis that re-classifies portions of a property from 27.5-year residential rental depreciation to shorter 5/7/15-year schedules — allowing accelerated depreciation. Real tax leverage; requires a qualified specialist; CPA partnership essential.
Debt Service
The total mortgage payment (principal + interest) over a measurement period — usually monthly or annual. The denominator in the DSCR calculation. Higher rates = higher debt service = lower DSCR for the same rent.
Debt Yield
NOI divided by loan amount. A lender’s second look at risk independent of property value. A loan that passes DSCR but fails debt yield is leveraged too high against the underlying income.
Delaware Statutory Trust (DST)
A passive replacement property structure used in 1031 exchanges. Investors own beneficial interests in an institutional-grade property managed by a sponsor. Useful for retirees exchanging out of active management. Has its own risks — illiquidity, sponsor concentration, fees — that require investor diligence.
Effective Gross Income (EGI)
Gross Scheduled Income minus vacancy and credit losses plus other income (laundry, parking, pet fees). The realistic top-line number used in NOI calculation.
Equity Multiple
Total cash returned over the hold period divided by total equity invested. A 2.0x equity multiple means the investor got back twice their capital. Useful for comparing long-hold deals where IRR can be misleading.
Gross Rent Multiplier (GRM)
Purchase price divided by gross annual rent. A quick comparison metric — lower GRM means better headline yield. Doesn’t account for expenses, so cap rate is more useful for actual underwriting.
Gross Scheduled Income (GSI)
The total rent the property would generate at 100% occupancy with all units rented at market. Theoretical ceiling. Real income is always lower; the gap between GSI and EGI is the vacancy and credit loss.
Hard Costs vs Soft Costs
In rehab budgeting, hard costs are the physical work (labor, materials, permits, fixtures). Soft costs are everything else (financing fees, holding costs, design, legal). Investors who track only hard costs lose 15–25% of their budget to surprise soft costs.
Internal Rate of Return (IRR)
The discount rate at which the net present value of all cash flows (initial investment, operating cash flow, eventual sale proceeds) equals zero. The most rigorous performance metric for a deal — accounts for timing of cash flows, not just totals.
Lease Option
A lease combined with an option for the tenant to purchase the property at a pre-agreed price within a defined window. Texas regulates this structure carefully under the Property Code — structured incorrectly, the option fee can be deemed a down payment with legal consequences.
Loan Constant
Annual debt service divided by loan amount. A simple way to compare loan costs across different terms and rates. A 30-year loan at 7% has a different constant than a 25-year loan at 6.5%; the constant tells the math story.
Loan-to-Cost (LTC)
Loan amount divided by total project cost (purchase plus rehab). Common metric for construction and rehab loans, where the lender is funding both acquisition and improvement. 80% LTC means the borrower contributes 20% of the all-in number.
Loan-to-Value (LTV)
Loan amount divided by appraised property value. The standard leverage metric for refinances and acquisitions of stabilized properties. Typical caps: 75% on investment cash-out refinance, 80% on investment purchase.
Loss-to-Lease
The dollar gap between Gross Scheduled Income at market rent and what the current rent roll actually produces. Tenants in place at below-market rent represent loss-to-lease the next investor can capture at lease renewal or turnover.
Master Lease
One investor leases an entire property from the owner, then subleases individual units to tenants. The master tenant operates the property, captures the spread between owner-paid rent and sublease rent, and accepts the operational risk.
Money-on-Money (MoM)
Synonym for Equity Multiple — total dollars out divided by total dollars in over the hold period. A 3.0x MoM means tripled capital. Excludes time-value of money, which is why IRR is the rigorous companion metric.
Net Operating Income (NOI)
Effective Gross Income minus operating expenses (taxes, insurance, management, maintenance, capex reserve, utilities not paid by tenant). Excludes debt service. The unlevered operating cash flow of the property.
Operating Expense Ratio
Operating expenses divided by Effective Gross Income. Typical residential rental: 35–50%. Higher means the property is expensive to operate relative to its rent — a flag to investigate before buying.
Owner Financing
Seller carries a note for some or all of the purchase price instead of the buyer using a conventional lender. Texas regulates owner financing on residential properties under the SAFE Act — for sellers doing more than a few transactions, registration may apply.
PITIA
Principal, Interest, Taxes, Insurance, Association dues. The full monthly housing cost. Cash flow calculations that miss the “A” (HOA) systematically overstate the income, especially in master-planned communities with substantial dues.
Pro Forma
A forward-looking financial model of the property — rent projections, expense assumptions, financing terms, expected cash flow. Brokers’ pro formas are typically optimistic. Investors should run their own conservative version before any offer.
Punch List
The list of items remaining to complete on a rehab or new build before final delivery. A walkthrough produces the punch list; the contractor or builder works through it before final payment.
Qualified Intermediary (QI)
The third-party that holds proceeds during a 1031 exchange. Mandatory for delayed and reverse exchanges. The investor cannot have constructive receipt of the funds at any point — the QI is the wall.
Real Estate Professional Status (REPS)
An IRS classification (per Section 469) that allows investors who materially participate in real estate full-time to deduct rental losses against ordinary income. Requires 750+ hours annually in real estate trades and that real estate is the majority of work time. Game-changing tax tool for those who qualify; sharp scrutiny if claimed without basis.
Recapture Tax
When an investment property is sold, depreciation taken during the hold period is “recaptured” and taxed at up to 25% (different from capital gains rate). The 1031 exchange defers recapture along with the gain itself.
Refinance Cash-Out
A refinance that pulls equity out of the property in cash. The end-state of the BRRRR strategy. Lender caps cash-out LTV at 75% for investment property in most cases; conventional sometimes lower.
Rent Roll
The schedule of tenants, units, current rents, lease terms, security deposits, and lease end dates. Due diligence requires verifying the rent roll against bank deposits to confirm rents claimed are actually being collected.
Schedule E
The IRS form used to report rental income and expenses for individual investors. Each rental property is reported separately on the schedule. The CPA who prepares this matters — sloppy Schedule E filings flag for audit.
Seasoning Period
The minimum holding time before a lender will refinance based on the new appraised value rather than the original purchase price. Most lenders require 6 months for cash-out; some allow 3 months or no-seasoning at a rate premium.
Sensitivity Analysis
Running the deal model with downside assumptions — what if rent comes in 5% lower, vacancy hits 8% instead of 5%, exit cap rate widens 50 basis points. The deals that survive sensitivity analysis are the ones with real margin.
Stabilized Yield
The yield (cap rate or cash-on-cash) the property is expected to produce once fully leased at market rent after any value-add improvements. Different from current yield, which reflects the as-is rent roll.
Straight-Line Depreciation
The default depreciation method for U.S. residential rental property: 27.5-year recovery, equal annual deduction. Cost segregation studies can reclassify components to shorter schedules for accelerated benefit.
Subject To
A creative financing structure where the buyer takes title subject to the existing seller’s mortgage — the loan stays in the seller’s name but the buyer makes the payments. Triggers due-on-sale clauses; carries real legal and credit risk for both parties. Texas attorney review essential before using.
Tenant in Common (TIC)
A form of co-ownership where each party holds a fractional, separately transferable interest in the property. Can be used as a 1031 replacement structure. Distinct from a partnership for tax purposes when structured correctly.
UPREIT
Umbrella Partnership REIT. A structure that allows owners of investment property to contribute it to a REIT in exchange for operating partnership units — deferring tax similar to a 1031. Mostly used for larger institutional-scale assets.
Vacancy Rate
The percentage of time a rental is unoccupied across a year, weighted by lost rent. 5% is a typical healthy assumption for single-family Houston rentals; 8–10% is more conservative; under 3% is optimistic.
Wraparound Mortgage
A new mortgage created by the seller that “wraps” the existing mortgage — the buyer pays the seller, the seller continues paying the underlying loan. Used in creative finance scenarios; carries the same due-on-sale concerns as Subject To.
Yield-on-Cost
Stabilized NOI divided by total project cost (purchase plus rehab). The cap rate equivalent for a value-add deal. The spread between yield-on-cost and prevailing market cap rate measures the value-add premium.
Underwrite the deal, then tour.
One short call. Tell me your strategy, target Houston ZIP range, liquidity, and timeline. I’ll match you to the right lender for your deal type and walk through what Houston actually has on market that fits the underwriting.
