Glossary

The rental investor's glossary

47 terms you will hear while buying and financing a rental, explained in plain English with simple examples. Bookmark this one.

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1031 Exchange

A 1031 exchange is a section of the U.S. tax code that may let an investor sell one investment property and roll the proceeds into another "like-kind" property while putting off capital gains taxes. The rules are strict, with firm deadlines for naming and closing on the replacement property, and an intermediary usually has to hold the money. This is general background only, not tax advice, so talk with a qualified tax professional before planning around one.

Related: Equity, Portfolio

A

Adjustable-Rate Mortgage (ARM)

An adjustable-rate mortgage, or ARM, keeps the same interest rate for an opening period, then can move up or down on a set schedule after that. The change is tied to a market index plus a fixed margin, and caps limit how far it can move. Some investors like an ARM when they expect to sell or refinance before the fixed period ends, but your payment could rise later, so plan for that.

Amortization

Amortization is the schedule for paying a loan down to zero through regular payments over its term, such as 30 years. Early on, most of each payment goes to interest; over time, more and more goes toward the principal. Looking at an amortization schedule shows you how fast you are building equity through your payments.

Appraisal

An appraisal is an independent opinion of a property's value, prepared by a licensed appraiser who inspects the home and compares it with similar recent sales. For DSCR loans, the appraisal often also includes a rent estimate for the property. The appraised value matters because it helps set how much can be borrowed.

B

BRRRR

BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat. An investor buys a property that needs work, fixes it up, places a tenant, then does a cash-out refinance based on the higher value to pull money back out for the next deal. It can be a powerful way to grow, but it depends heavily on accurate rehab budgets and realistic after-repair values, so go in with a cushion.

Business Purpose Loan

A business purpose loan is financing used for an investment or business reason, not for a home you or your family will live in. DSCR loans fall into this category, which is why they are only for non-owner-occupied rental properties. You will typically sign a statement confirming the property is for investment use.

C

Cap Rate

The capitalization rate, or cap rate, is a quick way to compare rental properties by dividing the net operating income by the purchase price. For example, a property with 12,000 dollars of yearly NOI that costs 200,000 dollars works out to 12,000 divided by 200,000, or 0.06, which investors would call a "6 cap." It ignores financing, so it shows how the property performs on its own, before any loan.

Cash Flow

Cash flow is the money left over each month after the rent comes in and all the property's bills are paid, including the mortgage, taxes, insurance, HOA dues, repairs, and management. If a home rents for 2,000 dollars and all-in costs are 1,750 dollars, your cash flow is 250 dollars a month. Positive cash flow gives you breathing room when something breaks or a unit sits empty.

Cash-on-Cash Return

Cash-on-cash return compares the yearly cash flow you receive with the actual cash you put into the deal, such as your down payment and closing costs. If you invest 50,000 dollars and the property produces 4,000 dollars of cash flow in a year, your cash-on-cash return is 0.08, or 8 cents back for every dollar invested. It is a handy way to see how hard your own money is working.

Related: Cash Flow, Cap Rate, Closing Costs

Cash-Out Refinance

A cash-out refinance replaces your current loan with a new, larger one and hands you the difference in cash. Investors often use it to tap equity in a rental they already own and put that money toward the next property. Lenders usually set limits on how much can be taken out and may require you to have owned the property for a certain time first.

Clear to Close

Clear to close means underwriting has signed off on every condition and the loan is ready for final documents and signing. It is the green light you have been waiting for. From here, the title or escrow team schedules your signing and prepares the final numbers.

Closing Costs

Closing costs are the fees and prepaid items due when your loan closes, separate from the down payment. They can include the appraisal, title insurance, escrow and recording fees, lender fees, points, and upfront deposits for taxes and insurance. You will see an estimate early in the process so there are no surprises at the closing table.

Related: Title Insurance, Escrow, Appraisal

Conditions

Conditions are the items underwriting needs before final approval, such as a copy of the lease, an updated bank statement, an insurance quote, or LLC paperwork. Getting a list of conditions is a normal part of the process, not a bad sign. Sending clear, complete documents quickly is one of the best ways to keep your closing on schedule.

Related: Underwriting, Clear to Close

Credit Score

A credit score is a number that summarizes how you have handled debt, based on things like on-time payments, balances, and length of credit history. Even though DSCR loans focus on the property's income, your credit score still matters and can affect pricing, how much you can borrow, and which programs fit. Paying bills on time and keeping card balances low are simple ways to protect it.

D

Debt-to-Income Ratio (DTI)

Debt-to-income ratio compares your monthly debt payments with your monthly personal income, and loans that qualify you on personal income lean on it heavily. DSCR loans generally take a different approach: they focus on whether the property's rent covers its own payment rather than on your personal DTI. That is why many self-employed borrowers and growing investors find DSCR loans easier to qualify for.

DSCR (Debt Service Coverage Ratio)

DSCR compares a property's monthly rent with its monthly housing payment (PITIA). If a rental brings in 2,000 dollars and the full payment is 1,600 dollars, the DSCR is 2,000 divided by 1,600, or 1.25. A ratio above 1.0 means the rent more than covers the payment, and lenders use this number to qualify the loan instead of your personal income.

E

Equity

Equity is the part of the property you truly own: its current value minus what you still owe on it. If your rental is worth 300,000 dollars and your loan balance is 200,000 dollars, you have 100,000 dollars in equity. Equity grows as you pay down the loan and as the property gains value, and you can sometimes tap it with a cash-out refinance.

Escrow

Escrow has two common meanings in real estate. During a purchase, an escrow or title company holds money and documents as a neutral party until everyone has met the terms of the deal. After closing, an escrow account is a separate account your loan servicer uses to collect a portion of taxes and insurance with each payment and pay those bills for you when they are due.

F

Fixed-Rate Loan

A fixed-rate loan keeps the same interest rate for the entire term, so your principal and interest payment never changes. That predictability makes it easier to budget and forecast cash flow on a rental. The tradeoff, compared with an adjustable-rate loan, is that you do not benefit if market rates fall unless you refinance.

Flood Insurance

Flood insurance covers damage from flooding, which standard property insurance policies usually exclude. If a property sits in a designated flood zone, the lender will require it, and the premium becomes part of your monthly costs. Check flood status early, because it can change your DSCR math.

Related: Hazard Insurance, PITIA

H

Hazard Insurance

Hazard insurance is the property insurance that protects the building against risks like fire, wind, and certain other damage. For a rental, you want a landlord or dwelling policy rather than a regular homeowner policy, and many investors add loss-of-rent coverage. The lender will require proof of coverage before closing, and the cost is part of your PITIA.

Related: Flood Insurance, PITIA, Escrow

HOA (Homeowners Association)

An HOA is an organization that manages shared areas and sets rules in many condo, townhome, and planned communities, funded by monthly or yearly dues from owners. HOA dues count in your PITIA, so they directly affect your DSCR. Before buying, check whether the HOA allows rentals and whether it limits short-term rentals.

I

Interest-Only

With an interest-only loan, your payment covers only the interest for a set period, so the balance does not go down during that time. The lower payment can improve monthly cash flow and your DSCR. Once the interest-only period ends, payments rise because principal must then be paid off over the remaining term.

L

Lease

A lease is the written agreement between you and your tenant that spells out the rent, the length of the stay, and the rules for both sides. On a refinance, a signed lease can help show the property's actual rental income. Use a lease that follows your state and local landlord-tenant laws.

LLC (Limited Liability Company)

An LLC is a type of business entity that many investors use to hold rental properties. It can help separate your business assets from your personal ones, and many DSCR programs allow you to close in the name of an LLC. Ask an attorney or tax professional whether an LLC fits your situation, and keep your formation documents handy for the loan file.

Long-Term Rental

A long-term rental is a property leased to the same tenant for an extended stretch, often 12 months at a time. Income tends to be steadier and easier to document than with a short-term rental, which can make DSCR qualifying simpler. Most first-time investors start here.

LTV (Loan-to-Value)

Loan-to-value compares the loan amount with the property's value. If you borrow 300,000 dollars on a home worth 400,000 dollars, the loan covers three-quarters of the value, and your down payment or equity covers the rest. A lower LTV usually means less risk for the lender and can lead to better terms.

M

Market Rent

Market rent is the rent a property could reasonably earn today, based on similar rentals nearby. For DSCR loans, the appraiser's market rent estimate is often what drives the calculation, especially on a purchase with no tenant yet. If the home is already leased, the lender may compare the actual lease with market rent and use the figure its guidelines call for.

Mortgage Broker

A mortgage broker is a licensed professional who shops your loan with multiple wholesale lenders instead of offering a single in-house product. The broker helps you compare options, gathers your documents, and guides the file through to closing, while a lender provides the actual loan. GoDSCR is a brand of Loan Daddy LLC, a mortgage broker.

Related: Wholesale Lender, Underwriting

N

NOI (Net Operating Income)

Net operating income is the yearly rent a property brings in minus its operating expenses, such as taxes, insurance, repairs, management, and an allowance for vacancy. It does not subtract the mortgage payment. NOI is the starting point for figuring out cap rate and judging how well a property performs on its own.

Related: Cap Rate, Cash Flow, Vacancy

Non-Owner-Occupied

Non-owner-occupied means neither you nor your family will live in the property; it is held strictly as an investment. DSCR loans are only for non-owner-occupied properties. If you plan to move in, even part time, a DSCR loan is not the right fit.

P

Personal Guarantee

A personal guarantee is your promise to repay the loan yourself if the borrowing entity, such as your LLC, cannot. Even when you close in an LLC, many DSCR programs ask the owners to sign one. It is worth understanding exactly what you are signing, so read the guarantee carefully and ask questions.

PITIA

PITIA stands for Principal, Interest, Taxes, Insurance, and Association dues. It is the full monthly housing payment on a property and the number DSCR loans compare against rent. For example, 1,200 dollars of principal and interest, 250 dollars of taxes, 100 dollars of insurance, and 50 dollars of HOA dues add up to a PITIA of 1,600 dollars.

Portfolio

Your portfolio is the full collection of investment properties you own. Investors usually build a portfolio one property at a time, using cash flow and equity from earlier deals to help fund later ones. Keeping good records on each property, like leases, insurance, and expenses, makes every future loan smoother.

Related: BRRRR, Equity, Cash Flow

Prepayment Penalty

A prepayment penalty is a fee charged if you pay off or refinance the loan within a set number of years. Many DSCR loans include one, and a common prepay structure is a fee that steps down each year until it disappears. Choosing a shorter prepay period or none at all is often possible, but it can change your pricing, so match it to how long you plan to hold the property.

Principal and Interest

Principal is the amount you borrowed, and interest is what you pay the lender for the use of that money. Your monthly principal and interest payment, often written P and I, is the core of your mortgage payment before taxes, insurance, and HOA dues are added. Over time, more of each payment goes toward principal.

Related: PITIA, Amortization, Interest-Only

Property Tax

Property tax is the yearly tax your local government charges based on the property's assessed value. It is part of your PITIA, so higher taxes mean a lower DSCR on the same rent. Keep in mind that taxes can be reassessed after a sale, so ask what the bill may look like under new ownership.

R

Rate-and-Term Refinance

A rate-and-term refinance replaces your current loan with a new one to change the interest rate, the loan length, or the loan type, without taking extra cash out. Investors use it to move out of a short-term or higher-cost loan into a long-term DSCR loan, or to switch from an adjustable to a fixed rate. Closing costs can usually be included within program limits.

Rent Schedule

A rent schedule is a section or form the appraiser completes that estimates a property's market rent by comparing it with similar rentals in the area. On a DSCR loan, this estimate is often the rent figure used to calculate the ratio. If you already have a tenant, the lender may also look at your lease.

Reserves

Reserves are cash or liquid funds you still have after closing, often measured in months of the property's PITIA. Lenders want to see that you could keep paying the mortgage if the unit sits empty or needs a big repair. Requirements vary by program, loan size, and how many properties you own.

Related: PITIA, Vacancy, Underwriting

S

Seasoning

Seasoning is how long you have owned a property or held certain funds before a lender will count them a certain way. For example, some programs want you to own a property for a period of time before allowing a cash-out refinance based on its new appraised value. Requirements vary by lender, so ask before you plan the timeline for a BRRRR deal.

Related: Cash-Out Refinance, BRRRR

Short-Term Rental

A short-term rental is a property rented by the night or week to travelers, often through vacation rental platforms. Some DSCR programs accept short-term rental income, using past booking history or a market income estimate, while others have extra requirements. Always check local rules and HOA restrictions first, since some areas limit or ban short-term rentals.

T

Title Insurance

Title insurance protects against problems with the ownership history of a property, such as an old unpaid lien, a recording error, or a missing heir with a claim. A lender's policy protects the lender, and an owner's policy protects you. It is a one-time cost paid at closing.

Related: Closing Costs, Vesting, Escrow

U

Underwriting

Underwriting is the lender's review of your loan file to decide whether it meets the program's guidelines. On a DSCR loan, the underwriter looks closely at the property, the appraisal and rent estimate, your credit, your reserves, and any entity documents. The result is usually an approval with a list of conditions to clear.

V

Vacancy

Vacancy is the time a rental sits empty with no rent coming in, such as between tenants. Smart investors set aside part of each year's expected rent as a vacancy allowance so a slow month does not become a crisis. Having reserves is your safety net when vacancy happens.

Vesting

Vesting describes exactly how ownership of a property is held on the title, such as in your own name, jointly with someone else, or in the name of an LLC. The way you vest can affect liability, taxes, and how the loan is structured. Decide on vesting early, because changing it late in the process can slow things down.

W

Wholesale Lender

A wholesale lender is a company that provides loans through mortgage brokers rather than working directly with the public. Because a broker can work with several wholesale lenders, you get the benefit of comparing different programs and terms through one point of contact. The wholesale lender is the one that actually provides the loan money at closing.

Related: Mortgage Broker, Underwriting

See these terms in action in our guides or try the DSCR calculator.

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