Glossary Of Terms


We trust that the following Empowered Investor Network Glossary will be helpful to you. It is not meant to be an exhaustive list as that would take hundreds of pages, but a short list of terms, techniques and concepts you need to know and some of the proprietary terms developed and trademarked by Jason Hartman, The J. Hartman Company or The Hartman Media Company. Please be sure to read and internalize this glossary as it will be quite helpful in reaching your investment goals. Happy investing!

Active income – income derived from physical activity such as working at a job, operating a business or hands-on management of real estate (when an investor is his/her own property manager).
Return to top

Affordability Index – the Affordability Index measures whether or not a typical family (a family earning the median family income as reported by the U.S. Bureau of Census) could qualify for a mortgage (at the rate on loans closed on existing homes) on a typical home (national median-priced existing single family home). This is generally calculated on a local basis so that affordability varies from market area to market area.
Return to top

Appreciation – the increase in market value of an asset over time. This is one of the primary goals of real estate investing, the other being a positive income stream.
Return to top

Arbitrage – taking advantage of price differences from one asset to another or one market to another. In the world of stocks and bonds, arbitrage can involve the simultaneous purchase and sale of an asset in two different venues in order to profit from the differential in price. For example, in one type of arbitrage, an investor may buy IBM shares on the New York Stock Exchange and sell the same shares on the London Stock Exchange if the price is temporarily higher in London. See The Double Inflation Arbitrage™ in relation to real estate investing.
Return to top

Area Agent – a real estate agent associated with PIN who lives in and specializes in a particular region of the country. Area agents are PIN’s “boots on the ground” to provide PIN investors with local eyes and ears during the purchase process and who act as a liaison between PIN, its investors and local sellers thereafter.
Return to top

Area Agnostic™ – an investment concept that is not focused on any one geographic area or marketplace but views anywhere and everywhere as equally attractive until proven otherwise. Rational investing requires that the investor not have pre-conceived notions, emotion-based partiality or non-analytical thinking that may exclude better opportunities elsewhere.
Return to top

Area Manager – a PIN in-house agent who personally visits and analyzes areas selected for investing and who does in-depth due diligence in evaluating exceptional opportunities for clients. In addition, all Area Managers act as on-going liaisons between clients / property owners, developers and property managers in his/her areas. In accordance with Platinum’s policy of “Putting Our Money Where Our Mouth Is,” all Area Managers own property in the areas they represent. This not only gives them a financial stake in their areas but also helps ensure that they remain current on all area developments.
Return to top

Asset allocation – a financial planning term that relates to how much of a specific class of asset an investor has in his or her overall portfolio. The concept relates to diversification so that all eggs aren’t in one basket. It also relates to liquidity so that all assets aren’t locked up in difficult-to-sell assets in case of an emergency need for cash. It also relates to management considerations so that an investor’s portfolio does not become so complex and diverse that it becomes difficult to control and manage. The ideal allocation differs from individual to individual so that the advice of a financial planner should be used in setting up the plan.
Return to top

Asset shortage – occurs when there is a limited supply of something and demand for the scarce asset increases faster than the supply can be increased. When this occurs, prices appreciate since those who can afford the scarce resource will be willing to pay more to obtain it from reluctant sellers. In real estate, this can lead to “bubble” markets since there are more buyers than sellers and in order to purchase a property, a buyer will have to pay more than other buyers or sweeten the deal to entice sellers unwilling to sell at lower prices.
Return to top

Assumptions – certain parameters that are accepted as true for purposes of calculating future projections, such as future rates of price appreciation, mortgage interest or future rental income. Assumptions are considered likely to occur but are not guaranteed and may require revision up or down if unexpected events occur.
Return to top

Average Price – the price obtained when all of the sales prices in a series of transactions are added up and divided by the number of transactions. The average is not the same as the median (see Median Price).
Return to top

Blended rate – there are two basic ways to calculate mortgage interest: fixed rate and adjustable rate (ARM). A pure fixed rate loan generally has a 30-year term and the mortgage interest rate stays the same for the entire 30 years. A pure adjustable rate loan has a similar term but the rate is re-calculated periodically during the term based on an underlying benchmark rate (such as LIBOR or the 11th District Cost of Funds). A blended rate loan combines features of both – it may have a 30-year term with an initial 3, 5 or 7 year period of adjustable rates and the balance of the term at a fixed rate. Blended rate is also a term that describes the weighted average of the interest rates when there are two or more loans, for example, when a property is purchased with an 80% first mortgage plus a 15% second mortgage plus a 5% down payment.
Return to top

Bond Market – there are two basic kinds of investment – equity (ownership) and debt (borrowed money). The stock market is for the transfer of equity interests among investors and the bond market is for trading bonds that represent corporate or government debt. The bond market is also looked to for clues about future inflation and mortgage rates since interest on long-term bonds reflects expectations of investors about inflation’s longer term destructive effects on the purchasing power of the currency.
Return to top

Borrowing power – a person’s ability to borrow, and the amount that person can borrow based on debt, income and other loan application criteria. Borrowing power is an important factor in using leveraged constructive debt.
Return to top

Bubble – a period of “irrational exuberance” that eventually results in unrealistically high asset prices. This greatly increases the risk of a significant decline in the value of that asset when the bubble “bursts.” However, in the context of real estate, staying out of the market when one local area is in a bubble may cause investors to forego good investments for two primary reasons (1) there is a saying that “all real estate is local.” While real estate can’t be moved from place to place, investors are free to invest anywhere they choose. While some markets may be in “bubbles,” others may actually be undervalued, and (2) bubbles relate to only one dimension of investing, price. Smart investors understand that real estate is multi-dimensional and are not fooled by myopic one-dimensional thinking. See Three Dimensional Real Estate Investing™.
Return to top

“Buy and Hold” – the investment strategy of buying an asset and holding it for the long term, generally five years or longer. This is the opposite of “flipping,” a strategy that emphasizes short-term buying and selling in the hopes of realizing fast profits. PIN’s investment strategy is based on the more conservative, analytical buy-and-hold approach.
Return to top

Capital gains – investors purchase certain assets because they can provide a stream of income (bank accounts, dividend-paying stocks, rental real estate) and also they can go up (or down) in value. When an investor purchases an asset and later sells it for more than he/she paid, the difference between the net proceeds (after commissions, costs, etc.) and the total cost (initial investment plus capital improvements) is called a “capital gain.” Of course, if the asset is sold for less than was paid, there is a capital loss, but that rarely happens with rental properties held for several years. Capital losses can generally be used to offset capital gains. Capital gains realized on assets held for more than one year are subject to a lower tax rate than regular income or short-term capital gains (less than one year). As with all tax matters, investors should consult qualified professionals before investing.
Return to top

Cap rate – short term for capitalization rate, the assumed rate of return on a real estate investment (usually used with commercial properties). It is determined by dividing the net operating income (total rent less costs) by the sales price of the property – the higher the cap rate, the better the deal. See Rent-to-Value (RV) Ratio.
Return to top

Cash flow – an income or expense stream over a given period of time. When income exceeds expenses, there is a “positive cash flow,” and when expenses exceed income, there is a “negative cash flow.” In terms of real estate investments, a “negative cash flow” can be viewed not as a net expense but as a measure of using maximum leverage. Platinum uses the term “Deferred down payment” instead of negative cash flow because it better describes the leverage aspect of financing the down payment over time rather than making a large up-front cash down payment.
Return to top

Cash reserves – money that is set aside in a separate liquid account such as a savings or money market account (or funds that are readily available through a home equity line of credit)to be used in the event of unexpected occurrences such as maintenance or periods of vacancy or to ensure that there is sufficient capital to cover the costs of negative cash flow (deferred down payment).
Return to top

Constructive debt (investment debt) – there is a generally believed premise that debt is bad and that a prudent person should avoid debt at all costs or face the poorhouse someday. The truth is that there are two very different kinds of debt – constructive debt and destructive debt. If you can borrow money at a low rate of interest and invest it at a higher rate of return, that is good (constructive) debt. It is using Other People’s Money (OPM) to grow one’s own wealth. (see destructive, or consumer debt).
Return to top

Cost-Benefit Analysis – the benefits of a particular investment are summarized and then the costs associated with that investment are subtracted. When this process is applied to several competing investments, it becomes clearer which is the better choice.
Return to top

Cyclic market – real estate markets in some areas are subject to considerable volatility – large price increases (“bubbles”) followed by large price declines. This roller coaster ride can lead to big gains or big losses and thus is best left to speculators. Orange County is an example of a cyclic market.
Return to top

Debt-to-Income (DTI) Ratio – when an investor applies for mortgage financing, the lender qualifies him or her by verifying factors such as income and debt obligations and calculating certain ratios that are designed to help the lender determine the risk of default. One such ratio is DTI which is calculated by dividing total outstanding debt by total qualified income. If an investor has too much debt for his or her income, the loan may be denied or granted at a higher interest rate (sub-prime).
Return to top

Deferred down payment™ – commonly called “negative cash flow,” this is how investors maximize leverage by financing all or part of the down payment. A smaller down payment means a larger mortgage and possible “negative cash flow,” but the money freed up can be used to purchase additional properties.
Return to top

Depreciation (cost recovery) – there is an accounting presumption that certain assets lose value over time due to technological obsolescence, wearing out, becoming out-of-fashion, etc. For example, a car with high mileage is worth less than the same model with less mileage, and an older house may be less desirable than a new house. Even though real estate historically increases in value over time, the I.R.S. allows investors to “write off” a fraction of the value of the improvements (buildings) each year against other income so that they can save tax money against imaginary depreciation losses. When the property is eventually sold, cumulative depreciation is “re-captured,” that is, the investor is taxed on the amount previously written off. This can be deferred by utilizing the provisions of I.R.C. Section 1031 relating to like-kind exchanges.
Return to top

Destructive debt (consumer debt) – the debt that is responsible for the erroneous premise that “debt is bad.” If you borrow money and consume it, you are left with nothing but debt payments and nothing of increasing value to show for it. Destructive debt includes borrowing to pay for day-to-day costs of living or to buy depreciating assets such as new cars, appliances, etc. It is using OPM to dig a deep financial hole that can lead directly to bankruptcy court.
Return to top

Direct investing – when an investor buys stock, he/she is buying a derivative that represents an interest in an asset over which he/she has no control. He/she trusts that the management of the company in which he/she owns stock will act in such a way that the investors’ interests will be maximized. In direct investing, an investor buys an asset over which he/she has direct control, such as a rental home that he/she owns, manages, and sells at his/her sole discretion, where he/she decides where to buy, when to buy, to whom to rent, when to re-finance, etc.. Control is the primary consideration.
Return to top

Diversification – there is an old admonition not to put all of one’s eggs in one basket, the idea being to spread the risk so that if a calamity befalls the basket, all of one’s eggs are not lost. This concept is central to PIN’s investment strategy. If an investor were to have all of his or her assets invested in one house, for example, and that house is destroyed by fire or flood, there is nothing left to offset the loss. Similarly, if one owns several properties in the same area, and that area is hit by an earthquake or economic downturn, all of one’s properties could be lost or significantly diminished in value. But if a number of properties are scattered around the country in diverse markets, it is not likely that all will be hit by a calamity. Diversification thus protects a portfolio by spreading and reducing the risk.
Return to top

DMA – Designated Market Area – a media term originally devised by the A.C. Nielsen Company that refers to a geographical region where the population can receive the same or similar media content (usually television and/or radio broadcasts). In a more general sense, this term can be used to describe metropolitan areas or significant population centers. DMA’s are usually defined by the largest city which is located in the approximate center of the region.
Return to top

Double Inflation Arbitrage™ – A concept devised by Jason Hartman that explains how to take advantage of inflation by (1) renting the property to a tenant whose rent (that generally increases over time) pays off the mortgage for the investor while (2) the investor pays the mortgage back in progressively cheaper dollars due to the destructive effects of inflation.
Return to top

Due diligence – investors should always do their own research and analysis (due diligence), even when working with a financial advisor. No one cares about your money as much as you do, so the more you know and the more you investigate on your own, the better chance of avoiding unpleasant surprises. Among other things, your due diligence should always include contacting property managers in the areas in which you plan to invest so you have first-hand knowledge of the rental markets.
Return to top

Equity – In real estate investments, a property owner’s equity is the difference between the fair market value of a home and the sum of all mortgages and other liens secured by that home.
Return to top

“Everybody is a genius in a bull market” – a statement illustrating that it can be easy to appear brilliant and successful when most investments are performing well (a bull market). “A rising tide raises all ships” and investors must be careful not to confuse luck with skill. Long-term success in real estate investing requires good analytical thinking, fiscal discipline, the ability to avoid complacency and not letting emotions overrule good solid financial and market analysis.
Return to top

Fiat money (paper assets) – paper money that has legal tender status simply as a result of government decree (paper currency that can be redeemed for a hard asset such as gold or silver is not considered fiat). Fiat currency has no intrinsic value (it is only worth the paper that it is printed on) but is nevertheless widely accepted as a valuable medium of exchange. The danger inherent in fiat currency is that the government may not exercise good judgment or discipline and issue so much paper that destructive inflation results. It is generally wiser to have one’s wealth in appreciating hard assets such as real estate than in depreciating paper assets.
Return to top

Financial planning – the ongoing process of devising a broad-based strategy designed to achieve an investor’s financial goals, then monitoring the economy and real estate market and modifying the plan, if necessary, as conditions change.
Return to top

Flight to quality – in times of economic uncertainty or political instability, investors seek “safe havens” for their money, in assets and places far removed from the turbulence. In international commerce, that generally means investors with money will buy assets with intrinsic value in safe places, such as real estate in the United States. So a flight to quality can mean foreign investors will purchase American real estate. Flight to quality in a domestic context means that investors will shift their funds from speculative or risky investments such as small-cap stocks into safer investments such as U.S. Treasury bonds, high-quality blue-chip stocks or real estate.
Return to top

Flipping – the practice of buying real estate with the intention of selling it within a few days, weeks or months for a higher price than paid. In over-heated “hot” markets, flippers often sell their properties even before escrow closes for significant gains. This is a very high-risk strategy, however, since even in “hot” markets the costs of the transaction (commissions, fees, loan points, etc.) often exceed the gains. See Gambling and Speculating.
Return to top

FNMA/Fannie Mae – Federal National Mortgage Association – a corporation established by the U.S. Government in 1938 (though it has no direct government backing or guarantees) to create a liquid secondary market for mortgages insured by the FHA (loans must meet strict underwriting standards). Fannie Mae buys mortgages from lenders on the secondary market, pools them for sale to individual investors as “mortgage-backed securities” and thereby replenishes the supply of money for additional mortgage lending. It is regulated by the OFHEO.
Return to top

Freddie Mac – Federal Home Loan Mortgage Corporation – a publicly-traded corporation chartered by the Federal Government in 1970 to purchase mortgages and then issue securities and bonds backed by those mortgages to be purchased by investors. This provides liquidity to the mortgage market so that funds are available for additional mortgage loans. It is regulated by the OFHEO.
Return to top

Full doc loan – a loan that requires a completely executed loan application including lender’s verification of borrower’s income, debts, assets, employment, source of funds for down payment, etc. It will also require credit reports and the borrower may also have to provide copies of past and current-year income tax returns. Generally, full doc loans offer the lowest rates of interest because there is less risk to the lender when everything is disclosed and verified.
Return to top

Gambling – Not to be confused with investing, gambling in real estate is similar in many respects to gambling in Las Vegas casinos – you roll the dice and hope Lady Luck is smiling at you. Gambling does not involve rational analysis or even an appreciation for the odds that a desired outcome may or may not actually occur. See speculating or flipping.
Return to top

Get-rich-quick scheme – tied in closely with instant gratification. Such schemes (many are legal, most are not) promise large rewards for small investments and appeal to people who want something for nothing – quickly – and are naïve and gullible enough to think they can actually have it. The only people who get rich from such schemes are the ones who promote them. In real estate, there are no legitimate get-rich-quick strategies for serious investors. See flipping, speculation and gambling.
Return to top

GMA – Greater Metropolitan Area – generally refers to large cities and their surrounding areas (which can include other cities as well as suburban areas, such as Albany-Schenectady-Troy in upstate New York). The boundaries of these areas are usually determined by population density and distribution and commuting distances. When it becomes too far to commute, the area is often considered to be outside of that GMA.
Return to top

Google Earth – a service of Google that provides detailed maps of any spot on earth via satellite images. Investors should use Google Earth as part of their due diligence to check for area and immediate neighborhood characteristics such as railroad tracks, airports, highways, industrial facilities, proximity to regional shopping, medical and educational facilities, etc.
Return to top

GO Zone – also known as the Gulf Opportunity Zone Act of 2005, this federal legislation establishes generous tax incentives for real estate investors in the areas affected by Hurricanes Katrina, Rita and Wilma (specified areas include parts of Alabama, Florida, Louisiana, Mississippi and Texas). This legislation is designed to provide more rental housing in hurricane-affected areas through 50% first-year bonus depreciation. Like all legislation, there are provisions, exceptions, loopholes and rules that must be followed. Investors should do their own due diligence and seek legal and accounting advice from qualified professionals before purchasing properties.
Return to top

Greater Fool Theory – a belief that “no matter what I pay, somebody will ultimately pay me more” – this is gambling rather than investing. While buying high and selling higher is a valid investment strategy, investors must be careful to avoid irrational exuberance and not buy in over-heated “bubble” markets that could expose them to unreasonably high levels of risk. There isn’t always a Greater Fool – and you do not want to be the Greatest Fool, buying at the top of the market.
Return to top

Gross rent multiplier (GRM) – a ratio that is used to roughly estimate the market values of similar income-producing properties in the same area. The annualGRM is obtained by dividing by sales price of the property by the annual potential gross rental income (before expenses and without vacancies). The lower the GRM, the more profitable the property. Looked at another way, GRM is the number of years a property would take to pay for itself in gross annual rent received.
Return to top

Hard assets – assets that have tangible physical characteristics such as gems, collectibles, precious metals, real estate, buildings, machinery, artwork, etc. Assets that have no physical character are called “intangible” assets and include such things as goodwill, copyrights, options, etc. Generally, in times of financial uncertainty, investors migrate toward hard assets as they are less likely to suffer significant loss of value.
Return to top

Hartman Risk Evaluator™ – a tool created by Jason Hartman to minimize risk when investing in real estate primarily utilizing the Land-to-Improvement (LTI) Ratio™ based on his theory that the cost of commodities / raw building materials will continue to increase due to massive consumption and prosperity of developing countries such as China and India. Since the value of land is primarily a function of supply and demand rather than cost of replacement, when the price of a property is primarily due to improvement value (low land costs), the rising costs of labor and building materials act as a floor against large price declines. However, when the price of a property is largely in the land component, there is no “floor” to keep prices from falling in a weak market.
Return to top

Highest and Best Use – a concept that states that the value of a property is directly related to the use of that property so that the highest and best use is that use which produces the highest property value so long as the use is legally allowed, physically possible and has demand in the marketplace.
Return to top

House Price Index – The Office of Federal Housing Enterprise Oversight (OFHEO) House Price Index is a broad measure of the movement of single-family detached house prices using data from conforming mortgage transactions at Freddie Mac and Fannie Mae. The numbers are reported quarterly for the nine U.S. Census divisions and the 50 states and the District of Columbia. HPI is computed by using repeat mortgage transactions on the same properties. By using price changes for the same properties, quality, location and architectural differences are minimized.
Return to top

Inflation – the tendency of fiat (paper) money to lose purchasing power over time. This is usually due to the fact that there is no requirement for paper currency to have something with intrinsic value, such as silver or gold, as a backing (in other words, can a holder of paper currency convert it into a fixed amount of gold or silver). Without such fiscal discipline, national treasuries can theoretically issue as much paper money as they can print, debasing the value of each unit of currency in circulation (an abundance of something makes it worth less; a scarcity makes it worth more). It will then take more units of the currency to purchase something that has intrinsic value (such as real estate).
Return to top

Inflation hedge – an investment that retains all or most of its value during periods of inflation. Without the hedge, inflation can devastate retirement plans and other long-term planning since the buying power of money over time is destroyed by inflation. One kind of hedge is an investment that increases in value faster than the currency depreciates (certain common stocks are an example). Another type of hedge is an asset that goes up in value when other assets of the same type are losing value (short sales in declining stock markets are an example). A third kind of hedge is a hard asset that has intrinsic value whose price goes up in direct proportion to the decline in the value of the currency (gold, real estate and certain collectibles are examples).
Return to top

In-migration – population is a mobile part of a free economy. People tend to move to areas where there is good employment, a temperate climate, low cost of living, good quality of life, high-quality schools, cultural activities, etc. Regions of the country that have these qualities experience an increase of population because people move there from other places. This is called “in-migration” and is a very important parameter when investigating where best to invest in rental property. It stands to reason that since everybody needs a place to live, areas with population growth will provide the best opportunities for price appreciation as demand for housing often exceeds supply. This is happening now in the Sun Belt states of the Southeast.
Return to top

Instant gratification – the inability to wait for a reward. Many impulsive people seek immediate satisfaction of their needs or wants and do not want to postpone that satisfaction to a later time. This is not a good trait for real estate investors since it leads to flipping, speculating and gambling rather than sensible long-term investing.
Return to top

Interest-only loan – a mortgage loan where there is no amortization of the principal. Each monthly payment is equal only to the amount of interest due on the original loan balance. At the end of the loan term, the full amount of the original principal is payable in one lump sum (or may be re-financed). This kind of loan allows the borrower to make smaller monthly payments, thus freeing up capital for additional investments.
Return to top

Investing – the conservative process of purchasing, managing and holding an asset with the twin goals of achieving a reasonable return on investment (ROI) through an increase in asset value over time and good cash flow (income). Note that due to the multi-dimensional nature of real estate investments, it is not necessary for the asset to increase in value in order for the investor to profit. Long-term investing involves careful analysis and discipline as opposed to the impulsive and often irrational behavior of short-term speculators.
Return to top

Investment analysis software – programs that assist in the analysis of multiple investments by defining and computing various parameters and facilitating the comparison of one investment against another. Platinum’s clients are able to calculate pro forma financial projections of any property and are also able to select the most desirable from among many alternatives by using the proprietary Property Tracker™ analysis software program.
Return to top

Investment Counselor – each Empowered Investor Network client is counseled and mentored by an in-house expert who discusses each client’s goals, financial plan, and preferences as to the areas and properties that he/she will purchase as part of his/her overall real estate portfolio. Counseling sessions provide an opportunity to compare potential investments and address individual goals, needs, preferences, finances, etc.
Return to top

IRR – internal rate of return, or the rate of return or growth a property is expected to generate. Comparing IRR’s gives a good indication of which property is the best in terms of growth and cash flow. In general, the higher a property’s IRR, the more desirable it will be as an investment.
Return to top

Land-to-Improvement (LTI) Ratio™ – an “Improve-ment” is a structure that has inherent value because of the materials and labor costs required to build it. Raw land has value only because of supply and demand factors. Therefore, price volatility of real estate is affected more by the value of the land component than the cost of the improvements. In areas where land values are relatively low, there is limited downside risk in soft markets whereas in areas that have a very large land component, there is much more downside risk. The LTI Ratio is used to identify low-risk vs. high-risk areas and individual properties – a high LTI implies higher price volatility and greater risk.
Return to top

Leverage – the degree to which an investor uses borrowed money as a way to amplify potential gains. However, leverage can magnify losses as well as gains if the investment is not profitable.
Return to top

Linear market – some markets just chug along and go up over time in a gradual but constant manner. These are the best areas for long-term real estate investors since the huge ups and downs of cyclic markets do not occur and the portfolio can be managed in a more analytical and rational manner. Austin, Texas is an example of a more linear market. Linear markets are akin to getting on base with singles and walks every time at bat rather than striking out half the time aiming for the fences.
Return to top

Loan-to-Value (LTV) Ratio – mortgage lenders’ collateral for loans is the property on which the mortgage is placed. In the event the borrower defaults and the property goes to foreclosure, the lender is paid back the balance due from the proceeds of the sale of the property. The greater the borrower’s equity (the difference between the fair market value of the property and the loans against it), the greater the safety margin for the lender. This safety margin is determined by dividing the total of all mortgages by the value of the property. For example, an 80% LTV means that the total of all loans is 80% of the value of the property and a 100% LTV occurs when the buyer puts no money down.
Return to top

Local Market Specialist (LMS) – no matter how much research an investor does on out-of-area properties, there is no substitute for eyes and ears on-site. That is why the Empowered Investor Network provides clients with access to local area agents, brokers, builders and sellers. That person becomes the investor’s connection with the local area and its unique characteristics.
Return to top

Market Forces vs. Builder Forces™ – refers to the dynamics of the real estate marketplace and the economy in general compared to the forces acting upon a specific builder / developer. For example, a local real estate market may be a “seller’s market” where prices are increasing and inventory is scarce. In such a strong market scenario, builders may be in a position to dictate terms and conditions for the sale of their inventory. However, due to the builder’s individual business considerations such as closing their books at their fiscal year-end, meeting internal business goals, maximizing shareholder value, maintaining sales momentum, etc. good opportunities may become available for astute investors.
Return to top

Median Price – the middle price of a series of prices. This is not an average of the numbers in the series, but is the one where there are as many numbers higher as there are lower. The median sales price of housing in an area is the middle price – there are as many sales at higher prices as there are at lower prices.
Return to top

MSA – Metropolitan Statistical Area – a term devised by the federal Office of Management and Budget (OMB) to describe a metropolitan area that meets specified size criteria. It is either a core city of at least 50,000 inhabitants or a spread-out urbanized area of at least 50,000 inhabitants with a central core city of at least 50,000 for a total population of at least 100,000 (several counties around a central city or a large population nucleus with its adjoining suburban areas that are usually within commuting distance). Also known as SMSA (Standard Metropolitan Statistical Area). The data can be obtained from the U.S. Census Bureau.
Return to top

Objective investing – when purchasing real estate, it is not uncommon to experience emotional reactions to certain geographical areas or specific properties. Emotions are usually not rational and can lead to bad financial decisions. Emotional purchases may be OK when buying a home to live in, but when it comes to investing, disciplined objective analysis is always required to be sure the best financial outcomes are realized. Platinum encourages its clients to always use Property Tracker™ software to help ensure objective decision-making.
Return to top

Office of Federal Enterprise Housing Oversight (OFHEO) – an independent organization within the Dept. of Housing and Urban Development (HUD) whose primary function it is to promote housing and a strong national home finance system by overseeing the capital adequacy and financial safety of Fannie Mae and Freddie Mac, the nation’s two largest housing finance institutions.
Return to top

Opportunity cost – when money is invested in a particular asset, it can’t also be invested in something else. Opportunity cost is the difference between what could have been earned in an alternative investment over what is actually earned in a chosen investment. A rational strategy is that given two or more investment alternatives, the investor will choose the one with the best return. Doing nothing is a choice – implying that what the investor is presently invested in is the best of all alternatives. If there is something better, it makes sense to switch to the better investment.
Return to top

Other People’s Money (OPM) – most people do not have enough liquid resources (or prefer not to risk or tie up their resources) to buy appreciating assets such as real estate. Rather than miss out on the many advantages of owning real estate, they borrow other people’s money (usually a bank’s) to acquire the asset and enjoy the use and increase in value of that asset while only having to pay back what was borrowed plus a little interest. All of the income generated by the asset and all of the appreciation in value of that asset is theirs – they do have to share any of it with the lender.
Return to top

Out-migration – this is the opposite of in-migration and occurs when an area loses jobs, has a high cost of living, lower quality of life, decaying infra-structure, has a high tax environment, becomes unfriendly to business and/or landlords, etc. Investors should avoid purchasing properties in such areas since there will be more supply of homes on the market than the remaining population can absorb. Prices tend to decline in such areas. This is happening now in some of the Rust Belt states such as Michigan.
Return to top

Packaged commodity investing™ – when purchasing a house (or any other finished product), one is actually buying a “package” of raw materials and fabricated commodities. Therefore, the sales price of a new house includes the prices of all the component parts such as lumber, glass, cement and copper piping and wiring, along with labor, other costs and the builders’ profit. The price of the commodities packaged into the house tend to provide a price floor that protects against a price collapse during housing recessions.
Return to top

Passive income – when an investor buys an asset that he/she does not actively work at or materially participate in managing but which generates an income stream, that income is passive. Examples are stock dividends, bond interest, rental property income, royalties from intellectual property and alimony income.
Return to top

Path of Progress – when geographic areas experience growth, housing, shopping centers, infrastructure development, public works facilities, etc. generally move outward from population centers in specific directions (for example, along navigation routes such as rivers or major highways or toward flat, easily buildable land). It is best to invest in the path of progress since real estate prices are lower before these areas are fully developed and increase significantly as development encompasses the area.
Return to top

Personal Use Property (PUP) – a property acquired as a primary residence, or as a second or vacation home, rather than for investment purposes. Emotional factors are more important than with rental properties. Ideally all properties need to “make financial sense” the day you buy them; however, many people let their emotions influence their decisions and let pride of ownership trump good financial analysis. For example, under certain circumstances it is better to rent than own one’s home. The Rent-to-Value (RV) Ratio™ is usually a good guide.
Return to top

Podcast – a technology that delivers audio content from websites to MP3 players such as the iPod. Subscribe to Platinum’s free investor Podcast at CreatingWealthPodcast.com
Return to top

Portfolio Approach – many unsophisticated real estate investors buy one or two properties, often in the same geographic area. This can be a risky and often unproductive strategy. The strategy recommended by The Empowered Investor Network reduces risk and increases overall economic gains as it is based on a portfolio tailored to the individual investor’s needs, stressing diversification among several geographic regions utilizing prudent long-term investment methodologies.
Return to top

Portfolio Makeover™ – a service offered by Empowered Investor Network Investment Counselors to show clients possible alternatives and opportunities for maximizing the value and potential alternative uses of their home equity, mutual funds, stocks, savings, etc. by comparing before and after results.
Return to top

Power Option Loan – gives the borrower the opportunity to pick one of four options every month so that the borrower can make minimum payments that could be less-than-interest-only and thus free up funds for further investments. When payments are less than interest only, the difference is added to the principal balance (negative amortization) increasing the amount due over time.
Return to top

Price-to-income (PTI) Ratio™ – Platinum’s analytical methodology for comparing alternative real estate investments (also see RV Ratio). The underlying concept is similar to the Price-to-earnings ratio utilized by investors in comparing common stock valuations – an investment that generates more income for the same amount invested is generally a better financial choice. Therefore, when a large investment yields a small income stream, it is likely to be over-valued and risky while a smaller investment for the same (or larger) income stream is less likely to experience a large price decline and may thus be a better investment choice.
Return to top

Pro-forma – literally means “depends on the context in which it is used.” It can refer to a partially completed document or one provided in advance of something actually happening. In accounting, a pro forma statement is generally one that excludes non-recurring or extraordinary items. In business, a start-up business plan may include pro forma statements that show anticipated results over time, before the results actually occur. See projections.
Return to top

Projections – using parameters that are certain (such as terms of an executed contract or lease) and various assumptions (such as expected annual rates of price appreciation)), projections are expected future outcomes of a particular real estate investment. Like assumptions, projections are not guaranteed and may need upward or downward revisions as events unfold.
Return to top

Raw materials – the materials or substances (commodities) used in the production of a finished product. In terms of real estate, raw materials are wood, glass, cement, copper, etc. The cost of raw materials is directly related to the cost of the finished product, so housing costs generally will not fall below the costs of construction or replacement. If home sale prices were less than raw materials (and labor) costs, the house would have to be sold at a loss to the builder.
Return to top

“Refi till ya die” ™ – in order to maximize the return and minimize the risk on an investment, it is best to keep your money working. As properties increase in value, investors realize growth of their equity in those properties. However, money in the form of equity is non-working – it is like putting your money in a bank account with a zero rate of return. The better strategy is to pull the equity out of the properties by re-financing and investing the borrowed funds in additional properties. This is how a small amount of money can be parlayed over time into a personal real estate empire.
Return to top

Rent survey – lenders generally want to know how many properties in a given area are owner-occupied and how many are rental properties. This is part of their underwriting requirements and is usually part of the appraisal of a non-owner occupied property. Investors should review this as part of their own due diligence before purchasing.
Return to top

Rent-to-Value (RV) Ratio™ – provides a quick “rule of thumb.” Cash flow (rental income) is one of the Three Dimensions of Real Estate Investing™ and the RV Ratio™ is a quantifiable way of evaluating one investment versus another. It is conceptually similar to the Price-to-Earnings ratio used to determine whether common stocks are over- or under-valued. Platinum’s opinion is that an ideal valuation measure for investment property is 0.7% or more while 0.5% is acceptable and below 0.5% is unacceptable (monthly gross rental income divided by the current fair market value of the property should ideally be 0.7% or higher). A lower RV Ratio™ indicates that better opportunities may be available elsewhere. Example:

Value Rental Income (mo.) RV Ratio™
Unacceptable $200,000$6000.3%
Acceptable $200,000$1,0000.5%
Ideal $200,000$1,4000.7%

RV Ratios™ vary as market conditions change so check with a Empowered Investor Network Investment Counselor for current information.
Return to top

ROI – “return on investment,” or the amount of money generated by a fixed sum invested, expressed as a percent. Note that it does not refer to the value of the asset – only to the actual amount invested. For example, if $10,000 were invested as a down payment on a $200,000 property and the property appreciated to $210,000 during the first year of the investment, the ROI would be 100% ($10,000 invested resulted in $10,000 of gains).
Return to top

Rule of 72 – a tool for estimating the time it takes for a real estate investment to double in value. Divide 72 by the appreciation rate to get the number of years it will take for the investment to double. For example, when property appreciates at a 6% annual rate, it will take 12 years to double (72 / 6 = 12).
Return to top

Scarcity – the economic problem that occurs when people have greater wants for a commodity or asset than its limited supply can satisfy. This causes people to make choices because they can not have everything that they want, at least not at reasonable prices. When there is sufficient demand at higher prices, scarcity is resolved by the market allocating the limited asset to those who can afford to pay more for it.
Return to top

Six-pack – generally refers to six bottles of beer or soft drinks in one package but PIN uses the term to mean six rental properties diversified over several different markets, purchased simultaneously. PIN believes that one of the virtues of its program is to reduce the risk of rental property investing by owning in different areas so that if one region is in recession or suffers a natural disaster, there are five other properties to soften the blow. Real estate investors should never put all their eggs in one market.
Return to top

SMSA – Standard Metropolitan Statistical Area – another term for MSA.
Return to top

Spec homes – homes built by a developer or individual builder as a “speculation.” The expectation is that the home can be sold for a profit after it is completed, but there is no certain buyer during the construction process. This can be a very profitable strategy for a builder during an appreciating market when houses sell quickly, but the property can become a very expensive “white elephant” if the market weakens and the house remains unsold for an extended period of time.
Return to top

Speculating – The process whereby an asset is purchased in hopes that it can quickly be sold to someone else at a higher price. See also gambling and flipping. Speculating is often based on little or no factual analysis, disregard for objective valuation, hype and hope and a belief in The Greater Fool Theory. It involves high risk and can result in large gains or losses.
Return to top

Stated assets – this is similar to stated income except that the lender accepts the prospective borrower’s list of owned assets without documentation or verification. This is sometimes because self-employed people may be unable to place an accurate dollar value on their business-related equity, or it may be for expedience in cases where assets are located in foreign countries, are in numbered Swiss bank accounts, or are hard to value, such as stock in a closely-held company.
Return to top

Stated income – when applying for mortgage loans, prospective borrowers fill out extensive loan applications which outline their income, debts, assets, credit scores, etc. Lenders then verify these numbers by checking with employers, tax returns, bank accounts, etc. before approving the loan. However, some borrowers have difficult-to-verify income (usually self-employment income) and lenders may approve loans for such borrowers without verifying income. They accept the borrower’s “stated income” on the loan application as accurate without documentation. This does not mean that the borrower need not be honest – over-stating income to qualify is loan fraud. Usually, because of the higher risk to the lender, such loans have higher interest rates.
Return to top

Subjective investing – occurs because real estate is often an emotional purchase, involving all of the senses and filling one of the three “universal needs.” When choosing a primary residence, it is OK to allow emotions to influence the final decision. But when purchasing properties for investment, it is best not to allow emotions to overwhelm good financial analysis (see objective investing).
Return to top

Tax free vs. tax deferred – “tax free” means that the investor will never have to pay tax on the gains or income from an investment. For example, municipal bonds are tax free with respect to the interest received. “Tax deferred” means that the taxes on gains or income will someday have to be paid, but can be postponed by taking advantage of provisions allowed under the Internal Revenue Code or other legislation. For example, capital gains on investment real estate can be deferred by exchanging property under Code Section 1031, or income can be offset by taking accelerated depreciation allowances under GO Zone legislation (depreciation must be “recaptured” when the property is ultimately sold).
Return to top

Ten-Year Treasury Rate – this is the interest rate on the 10-year U.S. Treasury bond, often referred to as the “bellweather rate” because mortgage rates and long-term bond yields are tied to this indicator of long-term interest rates. Unlike short-term rates such as the discount rate and the Federal Funds rate that are controlled by the Federal Reserve, the 10-year Treasury rate is determined in the open market by supply and demand for the limited supply of 10-year bonds available.
Return to top

Three Dimensional Real Estate Investing™ – in evaluating the relative merits of a real estate investment, three primary parameters must be considered: (1) price, (2) terms of financing and, (3) cash flow (income). It is important that investors do not focus on only one aspect (such as price, which in most cases is temporary) and miss out on a great opportunity (such as historically low mortgage interest rates that last the life of the loan – typically 30 years).
Return to top

Three Dimensional Real Estate Investing™ – in evaluating the relative merits of a real estate investment, three primary parameters must be considered: (1) price, (2) financing and, (3) cash flow (income). This helps ensure that investors do not focus on only one aspect (such as price) and miss out on a great opportunity (such as historically low mortgage interest rates).
Return to top

Time value of money – the value of a sum of money at any time in the present or future. This can be the present value of an amount that will be received in the future, the future value of a present amount of money, the present value of a stream of future payments or the future value of a stream of payments. In general, it is better to receive a sum of money today rather than the same amount in the future. That’s why an investor demands interest to compensate for the time that the money can’t be put to other uses and for the loss of buying power due to inflation – money today is worth more than the same number of dollars in the future.
Return to top

Universal need – there are three things that every person on the planet needs – food, clothing and shelter. Housing is thus something that has built-in intrinsic increasing demand – as the population grows, the need for housing must also increase. When one invests in an asset that has limited supply, is difficult to create more of, and everyone needs it, one has an ideal investment. Rental homes are just such an investment – they fill a universal need.
Return to top

Wholesaling – Selling a large number of properties to a single investor or investor group at a discount price.
Return to top

1003 – Uniform Residential Loan Application Form (Fannie Mae and Freddie Mac use the same form). Lenders and loan brokers use this form to record relevant financial information about an applicant for a mortgage loan. It is standardized so all lenders use the same form.
Return to top

1031 exchange – the provisions of this section of the Internal Revenue Code (I.R.C.) allow real estate investors to defer capital gains taxes when selling their investment properties by purchasing qualified replacement properties within the time allowed under the Code. The rules for qualified exchanges are complex so investors should always use qualified “intermediaries” to handle the transaction so that they don’t inadvertently violate the provisions of the law and possibly lose the tax deferral. Consult your Empowered Investor Investment Counselor for additional information. in depth 1031 content
Return to top