Glossary

Key terms and definitions used across Condo Investor Lab.

1% Rule: A quick screening guideline stating that a rental property's monthly rent should be at least 1% of its purchase price to indicate positive cash flow. It helps condo investors rapidly filter out properties that are unlikely to generate adequate returns.
1031 Exchange: A tax-deferred swap of one investment property for another that allows you to postpone capital gains taxes indefinitely. It is a powerful tool for condo investors looking to upgrade from a smaller unit to a larger or better-located property.
50% Rule: An estimation guideline suggesting that roughly 50% of a rental property's gross income will go toward operating expenses, excluding the mortgage. It gives condo investors a quick way to estimate net operating income before doing a full analysis.
Appraisal: A professional assessment of a property's market value conducted by a licensed appraiser, typically required by lenders. For condo investors, appraisals can be complicated by limited comparable sales within the same complex.
BRRRR Method: A real estate investing strategy standing for Buy, Rehab, Rent, Refinance, Repeat, designed to recycle capital across multiple properties. Condo investors can adapt this method when purchasing undervalued units in need of cosmetic renovation.
Cap Rate: Capitalization rate, calculated by dividing net operating income by the property's purchase price, expressed as a percentage. It allows condo investors to compare the return potential of different units and markets on an apples-to-apples basis.
Cash Flow: The net income remaining after all expenses including mortgage, HOA fees, taxes, insurance, and maintenance are subtracted from rental income. Positive monthly cash flow is the primary goal for most condo investors.
Cash-on-Cash Return: The annual pre-tax cash flow divided by the total cash invested, expressed as a percentage. It tells condo investors the actual return on the money they put into the deal, accounting for leverage.
Condo Conversion: The process of converting an apartment building or other multi-unit property into individually owned condominium units. These conversions can present investment opportunities but also carry unique legal and structural risks.
Condo Hotel: A condominium property operated as a hotel where individual units are owned by investors and rented out to guests through a management company. They offer a hands-off investment but often come with high fees and complex restrictions.
Condo Questionnaire: A detailed form completed by the HOA that lenders require before approving a mortgage on a condo unit, covering finances, insurance, litigation, and occupancy ratios. A problematic questionnaire can kill a deal, so savvy investors review it early.
Depreciation: A tax deduction that allows you to write off the cost of an investment property over 27.5 years, reducing taxable rental income. For condo investors, only the building portion is depreciable, not the land.
Estoppel Certificate: A legal document from the HOA confirming the current status of fees, assessments, and any violations associated with a specific unit. Condo buyers should always request one before closing to avoid inheriting surprise debts.
FHA Loan: A government-backed mortgage insured by the Federal Housing Administration that allows lower down payments, typically 3.5%. Not all condo complexes are FHA-approved, which can limit your buyer pool when selling.
GRM (Gross Rent Multiplier): The ratio of a property's purchase price to its annual gross rental income, used as a quick valuation metric. A lower GRM generally indicates a better deal for condo investors, though it ignores expenses.
HOA Budget: The annual financial plan created by the homeowners association that outlines expected income from dues and projected expenses for the complex. Condo investors should scrutinize the HOA budget for underfunded categories that could lead to special assessments.
HOA Reserve Study: A professional analysis of the condo association's reserve fund that evaluates whether enough money is set aside for future major repairs and replacements. A poorly funded reserve is a red flag that often precedes expensive special assessments.
Lien: A legal claim against a property for unpaid debts such as delinquent HOA dues, taxes, or contractor bills. Purchasing a condo with an existing lien can make the new owner responsible for the outstanding balance.
NOI (Net Operating Income): The total rental income minus all operating expenses, excluding mortgage payments and income taxes. NOI is the most fundamental profitability metric condo investors use to evaluate and compare properties.
Non-Warrantable Condo: A condo that does not meet conventional lending guidelines due to factors like high investor-ownership ratios, pending litigation, or a single entity owning too many units. Financing is harder to obtain, but non-warrantable condos can offer discounted purchase prices.
Owner-Occupancy Ratio: The percentage of units in a condo complex that are occupied by their owners rather than rented out. Lenders typically require at least 50% owner-occupancy for conventional financing, directly affecting an investor's ability to get a mortgage.
Price-to-Rent Ratio: The ratio of a property's purchase price to its annual rental income, used to gauge whether buying or renting makes more financial sense in a given market. Condo investors use it to identify markets where rental demand is strong relative to property prices.
Property Management Fee: The percentage of monthly rental income, typically 8-12%, charged by a professional management company to handle tenant placement, maintenance, and rent collection. This fee is a key expense that condo investors must factor into their cash flow projections.
REIT: A Real Estate Investment Trust, a company that owns and operates income-producing real estate and trades like a stock. REITs offer condo investors a way to diversify into real estate without directly owning additional properties.
Rent Roll: A document listing all rental units in a property along with their tenants, lease terms, and monthly rent amounts. Reviewing the rent roll is essential due diligence when acquiring a condo or condo portfolio with existing tenants.
Special Assessment: A one-time fee charged by the HOA to unit owners to cover unexpected major expenses such as roof replacement, elevator repair, or structural remediation. Special assessments can cost thousands of dollars and significantly impact a condo investor's returns.
Surfside Effect: The increased scrutiny of condo building safety and reserve funding following the 2021 Champlain Towers collapse in Surfside, Florida. It has led to stricter inspection requirements and larger reserve contributions in many states, raising costs for condo owners.
Vacancy Rate: The percentage of time a rental unit sits empty and generates no income over a given period. Condo investors should budget for a vacancy rate of at least 5-8% when projecting annual cash flow.
Warrantable Condo: A condo that meets all of Fannie Mae's and Freddie Mac's guidelines for conventional financing, including adequate reserves, owner-occupancy ratios, and no significant litigation. Warrantable status makes a condo easier to buy, sell, and finance.
Zoning: Local government regulations that dictate how a property or area can be used, such as residential, commercial, or mixed-use. Zoning laws can affect whether a condo can be used as a short-term rental, directly impacting an investor's income strategy.