Investment Real Estate Terminology

Cash flow is the "spendable income" generated by an investment property after all expenses have been paid. It is the money that remains in the investor's pocket at the end of the month or year. To calculate this, an investor takes the rental income and subtracts all operating expenses (like taxes, insurance, and maintenance) and the full mortgage payment (debt service). If the resulting number is positive, the property has positive cash flow, meaning the property pays for itself and provides profit. If the number is negative, the investor must feed monthly cash into the property to keep it afloat.Leverage is the practice of using borrowed money to increase the potential return on an investment. In real estate, this is often referred to as using "Other People's Money" (OPM). Because a bank will typically lend a large percentage of the purchase price (for example, 75% or 80%), an investor can control a large, valuable asset with a relatively small amount of their own cash. If the property value rises, the investor keeps the appreciation on the entire property value, not just on the cash they put down, effectively magnifying their rate of return. However, leverage acts as a double-edged sword; if the property value drops, the losses are also magnified.