When you’re new to rental property investing or are thinking about exploring rental property ownership, there are a few common terms and definitions to know. Like any industry, there is lingo and jargon with which some may not be entirely familiar. To help you have some clarity, we’ve put together a comprehensive guide to rental property management terms. Of course, this isn’t an all-inclusive list, but these are the most important terms to know when you get started.
Types of Rental Property
Rental property investing often begins with one property and then leads to a full-fledged effort to grow a portfolio of properties. Here are definitions and terms you might hear when you’re looking to diversify your portfolio by investing in different types of structures.
Commercial: This property is typically zoned for commercial use and is intended to rent to one or more business entities.
Single-Family: This is a structure built and categorized as a home for one family or resident.
Multi-Family: These buildings have multiple units that can be leased to several different individuals or families under one roof.
Condo: These buildings will have multiple units that can be owned by different people. These structures usually also provide common areas and amenities that residents can share.
Duplex: This property is a house built to serve as a dwelling for two separate families or individuals within the same structure. Often these are upper and lower floor designs with main entries separate for each.
Vacation Rental: This type of property is a fully furnished space that can be rented out for short-term periods to guests.
Turnkey Property: This type of property is any kind that can be immediately rented out upon purchase, without any or significant investment to make it market-ready.
HOA: A Homeowners Association refers to an organization whereby homeowners or residents within a specific community, complex, or subdivision agree to abide by guidelines and rules for residency.
Investment and Value-Related Terms
You likely wanted to get into rental property investing for the financial benefits or to establish passive income. There are full libraries of terms related to lending, financing, and bookkeeping for your property. However, these few terms related to the value and investment nature of the property tend to be more prevalent in conversation.
Fair Market Value (FMV:) This term refers to an agreed-upon value or price among sellers and buyers, driven by current market conditions for the area.
Accumulated Depreciation: This refers to the property’s depreciation from the moment of acquisition to the absolute latest snapshot of time in a dollar amount.
Annual Depreciation: This refers to the depreciation of a property in its most recent fiscal year of operations in a dollar amount.
CAP Rate: The Capitalization Rate describes an anticipated rate of return on a rental investment property based on the asset’s investment potential and profitability.
Equity: As you might already know with your personal homeownership experience, equity refers to the difference between the property’s market value and its monetary amount owed to the lender. Equity can be a great tool for financing rental property renovations and for funding purchases of new properties to add to your portfolio.
Net Operating Income (NOI:) This is a before-tax figure that captures all of a property’s revenue minus essential operating costs. The NOI does not include capital expenses, depreciation, or amortization.
Comparables: This is typically part of your valuation process whereby you compare other recently sold properties to gauge value estimates.
Vacancy Rate: Buying a rental property means also evaluating any pre-existing vacancy rates. These datasets show the ratio of non-occupied rental units to the total number of units in a given building or area.
Necessary Paperwork and Documentation
There are full glossaries available to describe the various tax, accounting, and bookkeeping terms that coincide with running any business. But when it comes to successful rental property management, these are usually the most important documents and terms with which you’ll want to be most familiar.
Profit and Loss Statement: This is your annual lookback, in the form of a financial report that highlights real net profit prior to taxes.
Rent Schedule: This is a written document that itemizes rental rates that could be implemented by the property owner or management partner.
Rent Roll: This is your register of incoming rent, typically organized by resident name, amounts owed, and totals received.
Operating Budget: You’ll want to keep an eye on this one fairly often since it’s your financial plan outlining predictions for income, offset by operating expenses. This will be your cash flow guide and help you make sound decisions based on your current financial position.
Rental Insurance: There are several insurance products on the market designed specifically for rental property owners. From general property coverage to guaranteed rent insurance that pays uncollected rent from a vacated resident, you’ll want to be familiar and have coverages in place to protect your investment.
Fees, Charges, and Costs
Here are several terms and definitions that relate to various costs, fees, and charges associated with rental property management and ownership.
Startup Costs: Startup expenses are those you incur to get your rental property business up and running. Any expense that would be considered deductible as an operating expense by an ongoing business is categorized as a startup expense when it's incurred before a business begins.
Management Fees: Property management fee refers to the fee payable to the Manager for its day-to-day management of the rental property pursuant to the terms of the management agreement.
Leasing Fees: The leasing fee is what a property management company usually charges to secure residents for the rental property. The leasing fee is intended to cover all the work involved in getting a lease, including showing the property, pre-screening all the applicants, and finding a quality resident.
Maintenance Fees: This is typically an additional cost charged to residents that covers the costs associated with the upkeep of buildings, landscaping, and common areas.
Service Fees: The service fee is a one-time charge, payable along with the first rent, usually within the 24-hour window and after the property owner has approved the request. This fee allows for the provision of services and end-to-end management efforts.
Percentage Fees: These variations of fees are most often executed by property management companies as a monthly charge. In general, these can fall between 8% – 12% of the monthly rent collected.
Government-Related Rental Property Terms and Definitions
Depending on where you purchase rental property and the type of structure it is, you might need to know about housing assistance programs. And there are other government-related terms and definitions to know, as well, to ensure you remain compliant with leasing regulations and can maximize any programs that might be available to your residents.
Subsidy/Subsidized: These terms refer to government financial aid programs that bridge the financial gap for individuals and families within certain groups to find affordable housing.
Section 8: This program allows private property owners to rent out properties to low-income residents at equitable market rates. It’s a voucher program that subsidizes rental payments.
Persons with Disabilities Act: This law ensures residents who present with disabilities have equal opportunity for residency without discrimination.
Low-Income Tax Credit (LITC:) This term refers to rental properties that are eligible for tax credits as an exchange for signing lease agreements with participating and eligible residents. Usually, the criteria are rooted in requirements set forth by HUD, the IRS, or the Justice Department.
Housing and Urban Development (HUD:) The Housing and Urban Development office is the federal department responsible for overseeing regulations intended to improve the rate of homeownership and affordable housing.
Housing Assistance Payments (HAP) Contracts: These types of contracts will allow rental property owners to receive rental assistance on behalf of the low-income household.
Equal Housing Opportunity: You’ll see this language a lot, especially when it comes to marketing a rental property. This phrase refers to the commitment to provide an equal opportunity for residency, not at all impacted by age, disability, gender, familial status, race, or nationality.
Fair Housing Act: This is a mandate and federal law that governs policies regarding discrimination. Its language prohibits discrimination or residence determination based on race, age, disability, familial status, religion, gender, or nationality.
Rental Property Maintenance Definitions
Once you own your first rental property, you’ll want to protect your investment by engaging in routine and seasonal maintenance. And there are other renovations or improvements, sometimes used in slang or conversation, that will be helpful to know.
Curb Appeal: This term is really just a concept that refers to the overall aesthetics and attractiveness of your property to potential residents upon viewing from the street, as a first impression.
HVAC: Heating, ventilation, and air conditioning are often terms shortened to HVAC. But the term refers to these operating systems within your property and represents an industry of professionals who are trained and certified to repair, maintain, or replace units responsible for heating, ventilation, and cooling systems.
Property Inspection: There are different types of inspections and inspectors, for that matter. And you may not need a new buyer home inspection or a code-specific inspector all the time. But it is recommended to schedule annual or seasonal, four-point inspections to ensure the proper function and safety of your rental property, to help you stay ahead of costly repairs or risks.
Preventive Maintenance: This term refers to the general and ongoing upkeep of your rental property. It implies staying ahead of problems by making necessary repairs and improvements along the way, like replacing furnace filters, trimming low-hanging branches, and securing loose railings.
Resident-Facing Terms
Here are some resident-facing terms and definitions you’ll want to know to effectively manage your rental property.
Lease Agreement: This is the binding contract in which both you and the new residents agree to terms, conditions, rental rates, timelines, communication, expectations, and consequences.
Rental Rate: This is the rate of payment you expect residents to pay in exchange for living in your property.
Subletting: This term refers to the act of renting to a third-party resident under the umbrella agreement of the original resident’s lease.
Three-Day Notice: This is just one type of eviction notice used in some states that demands payment of delinquent rent within a three-day window of time or vacating the premises altogether.
Tenancy at Suffrage: This refers to a scenario in which a resident occupies a property without a viable lease in place but approved under the owner’s permission. Sometimes called a tenancy at will, this might happen when a resident’s lease has ended, but the resident remains in the property for a short amount of time.
Pre-Screening: This refers to the vetting steps a rental property owner might take before agreeing to extend the lease to potential residents. This process might include verifying employment, calling past landlords for references, and assessing credit histories.
Security Deposit: This rental property term refers to a set amount owners might collect upon execution of a lease agreement. The security deposit terms will be outlined in the lease regarding what conditions warrant a return of the deposit when the lease ends. Usually intended to protect the investor from excessive property damage or uncollected rent, security deposits are an industry standard. And when the resident leaves, you can finalize the Statement of Deposit (or SODA) to reconcile and remaining balances.
Eviction: This is the legal process for removing a resident from the property. Reasons might include delinquency in payment or lease term violations.
Eviction Notice: This is the legal notice provided to the resident that describes the violation and timeline to vacate. Eviction notices aim to inform residents officially of your plans to evict or bring a lawsuit.
Lease Terms
There is some lease lingo you’ll want to add to your vocabulary. Here are a few of the basics to get you started.
Lessee: This is the resident who rents the property from the property owner landlord.
Lessor: This is the rental property owner or landlord who grants the lease to the resident.
Lease: This is the binding and official contract outlining the terms and conditions between a property owner and the resident, under which the resident gets an exclusive right to occupy the home for a fixed term. In turn, the property owner receives payments for the duration of the agreement.
Lease Option: This refers to an agreement that provides the resident with an option to buy the property during or toward the end of the tenancy. This agreement also prevents the owner from selling the rental property to any third parties until the lease expires. It’s often also termed as contract for deed.
Lease Renewal: This refers to a continuation of the lease after its initial expiration.
Lease Term: This refers to the timeline restrictions regulating a resident’s right for the home’s exclusive possession.
Leasing Agent: Any authorized and licensed agent who leases real estate properties and executes them on behalf of the lessor.
Long-Term Rental: A long-term lease is often defined as a lease agreement that extends for more than one year.
If you’re just getting started on your rental property investment journey, keep this roster of terms and definitions on hand. And remember, you don’t have to go it alone. Let Axel Property Management be your guide through every decision from first-time purchases to complex portfolio development and every resident-related management task in between!
