Before you invest in commercial real estate—or partner with anyone on a deal—I always suggest that the first 2 things that people should do are:
- Learn the terms
- Learn how a deal is structured (so you can see how money is made or lost)!
Why do you need to learn this?
It’s not just so you sound smart in meetings.
It’s so you don’t get played.
Real estate investing has its own language.
If you don’t speak it, someone can make a deal sound good that really isn’t. That’s how people lose money, overpay, or sign onto something they don’t fully understand.
Learn the terms. Learn the structure. Then go do the deal.
💰 Basic Terms Related to Property
NOI (Net Operating Income)
👉 This means: How much money the building makes after expenses.
🛠 Example: Rent = $10,000/month, expenses = $3,000 → NOI = $7,000/month.
Why it matters: This number helps decide what the property is worth.
Cap Rate
👉 This means: How much return you’d get if you bought the building in cash.
🛠 Example: A $1 million property that makes $70,000/year in NOI = 7% cap rate.
Why it matters: It helps compare deals quickly.
ARV (After Repair Value)
👉 This means: What the property could be worth after you fix it up.
Why it matters: This number helps lenders know if your upgrade plan makes sense.
Off-Market
👉 A property for sale that isn’t listed publicly.
Why it matters: These can be great deals… or problems people are hiding. Always do your homework.
Stabilized
👉 This means: The building is fully rented and running smoothly.
Why it matters: Banks like stable stuff. If it’s not stabilized, they often say no.
Acquisition
👉 The process of buying the property.
Why it matters: Every deal starts with finding and closing on the right asset at the right price. If you can find something ‘off-market’ which means direct to the seller, even better!
Reposition
👉 Improving the property to increase its value or cash flow.
Why it matters: It’s a common value-add strategy that creates equity. This is what you need to do in order to ‘stabilize’ the property, minimize the risk, and qualify for a loan for the bank.
Disposition
👉 The sale or exit of the property.
Why it matters: This is how most investors cash out or move to the next deal.
Value-Add
👉 A strategy where you improve a property—like renovating units or raising rents—to make it more valuable.
Why it matters: It’s one of the most common ways investors create equity and boost returns. It can be something internal like improving processes and reducing expenses. Or something more physical like updating the condition of the property, i.e. new counters, floors, and appliances.
🏦 Loan & Lender Terms
LTV (Loan to Value)
👉 This means: How much money you’re borrowing compared to what the property is worth.
🛠 Example: You borrow $700K to buy a $1M property → LTV is 70%.
Why it matters: The rest (30%) comes from you or investors.
Bridge Loan
👉 A short-term loan that helps you close fast, fund renovations, or buy time before refinancing.
Why it matters: Great for value-add or distressed deals. Not meant to hold forever—just long enough to “bridge” the gap and transition into longer term debt.
Permanent Financing
👉 A long-term loan (usually 5–10+ years) you get once the property is stabilized.
Why it matters: Replaces short-term financing like bridge loans and locks in better terms.
Agency Debt
👉 A long-term loan backed by a government-sponsored entity like Fannie Mae or Freddie Mac.
Why it matters: These loans are great for stabilized multifamily properties—but harder to qualify for. Usually cheaper rates and longer terms than private lenders.
DSCR (Debt Service Coverage Ratio)
👉 This means: Can the rent cover the loan payments?
🛠 Example: Building makes $6,000/month. Loan costs $5,000/month → DSCR is 1.2.
Why it matters: Most lenders want this number to be at least 1.2 or higher.
Interest-Only Loan
👉 This means: You only pay interest, not the loan balance, for a while.
Why it matters: Smaller monthly payments while you fix up or flip the property.
Loan to Value (LTV)
👉 You’ve seen it before, but here’s a reminder: It’s how much the loan is compared to the value.
🛠 $800K loan on a $1M property = 80% LTV.
Why it matters: The lower the LTV, the safer the lender—and the more cash you need to bring in.
Balloon Payment
👉 This means: You make small payments now, and one big payment later.
Why it matters: You’ll need a game plan to pay off the big chunk at the end.
Pro Forma
👉 This is a prediction of how the property will perform once stabilized.
🛠 Example: It shows what rent, expenses, and profit could look like next year.
Why it matters: It’s how deals are sold—and sometimes oversold. Know what’s real vs. hopeful.
Underwriting
👉 The process of analyzing whether the deal works financially.
Think: A deep look at rent, expenses, income, risks, and potential.
Why it matters: Underwriting tells you if this is a deal or a disaster.
Seller Carry
👉 The seller acts like the bank—they let you pay over time instead of all upfront.
Why it matters: Great for deals where you can’t get full financing or want to avoid a bank.
👥 Who’s Who in the Deal
GP (General Partner)
👉 This is the person who runs the deal—finds the property, makes the plan, manages the process.
Think: The project manager.
LP (Limited Partner)
👉 These are the investors who put in money in exchange for equity but don’t run the deal.
Think: Silent partners backing the deal financially.
KP (Key Principal)
👉 Someone who helps the deal get approved by showing good credit or strong finances.
Think: The person with high net worth and liquidity whose net worth exceeds the property value.
Equity Split
👉 How the profit gets divided (determined by GP’s during the underwriting process).
🛠 Example: LPs get 70%, GP gets 30%.
Why it matters: This tells you how much equity you’ll receive and what you’re really earning.
🚪 What Happens at the End
Refinance
👉 Getting a new loan to replace the current one—hopefully with better terms.
Why it matters: It’s one way to cash out some of your gains without selling.
Upside
👉 The potential for the property to make more money over time.
🛠 Example: Rents are low, but you can raise them after improvements = upside.
Why it matters: This is what you get paid for—if you execute the plan.
Exit Strategy
👉 This means: What’s the plan once you stabilize the building? Do you want to sell it, hold it, or refinance it?
Why it matters: No one invests just to “see what happens.” You need a plan to exit (AND profit)!
Waterfall
👉 Fancy word for: who gets paid what, and in what order.
Why it matters: Some people get paid first. Some get more after a certain return is hit. (This is advanced, but good to hear early.)
💬 Final Thoughts
You don’t have to memorize everything.
But you do need to understand enough to protect yourself—and ask the right questions.
Learn the language.
Then make moves.
Learn your commercial real estate terms and start better conversations, today.