monthly basis.An Example of DebtWhen a development

Real Estate Investing Terms Flashcards DebtAn amount of money (obligation) owed by one party (the borrower) to another party (the lender), also known as a loan. Debt does not represent an ownership interest, although it is sometimes secured by a lien against property owned by the borrower, allowing the lender to foreclose on the property if the borrower is in default under the terms of the agreement. The debt (or loan) on a real estate property is in a senior position relative to the equity and is the first to receive payment from any cash flow or profits. Generally speaking, debt carries a fixed interest rate that is paid on a monthly basis.An Example of DebtWhen a development company begins a new project, they borrow money in the form of a construction loan. When you invest in real estate debt, you are in effect lending your funds to an owner or purchaser of real estate. You receive periodic interest payments from the owner and a lien against the property in the form of a mortgage. At the end of the mortgage term, you get back the balance of your principal.Real estate debt provides leverage, increasing returns and allowing investors to buy buildings they otherwise could not access with only their own capital.Conversely, taking on debt can increase the potential for a default and loss of investment if the value of the property decreases, or cash flows are unable to cover debt service (the amount of payments required under the loan).The ability of a property's cash flow (either existing or future) to service debt is one important indicator of inherent risk in the investment.Generally speaking, the greater the amount of debt (i.e. the more leverage) the riskier the investment.Senior DebtThe "base" of the Capital Stack, Senior Debt is generally secured debt that must be repaid first, before Junior Debt, Mezzanine Debt, Preferred Equity, and Common Equity, respectively.Senior Debt holders retain the right to foreclose on their property, sell it through a trustee, and recoup the fair market value of the property, up to the loan amount, including principal, interest, and fees.Senior Debt generally carries less relative risk to other portions of the Capital Stack, and is therefore less expensive.Most Senior Debt lenders are large financial institutions with pooled capital such as banks, insurance companies, and pension funds.

TermIn real estate, the "Term" typically refers to the lifespan of a given asset or liability.A loan or an investment typically would a have a term (ex. 5 years), at the end of which the loan or investment would be paid back plus any interest or payments owed.AppreciationTypically, a landlord will sign a lease with a tenant in exchange for monthly rent. In addition to the rent, the value of the real estate may increase or decrease in value over time.An increase in value is referred to as "appreciation" and a decrease in value is referred to as "depreciation".There are many reasons why a property may

increase or decrease in value, most notably:The rate of

inflationThe growth in the nearby surrounding market Regulation ARegulation A allows unaccredited investors to purchase small offerings of securities that do not exceed $5 million in a 12-month period.These securities require an offering statement to be qualified with the SEC, which results in time-consuming and costly review by the SEC.A Regulation A offering needs to be registered in each individual state where potential investors reside, limiting access to most

Reg A offerings.Additional Resource: Now, Real Estate

Where Anyone Can Invest DevelopmentDevelopment is the process of building or adding to existing structures to increase the value of a

property.Examples include:Improving the value of raw land

by obtaining permits or building infrastructure, such as a suburban housing tract.Redeveloping an aging building to increase its revenue or future sales price, as is the case of a warehouse conversion to residential condos.Hard AssetA tangible object of worth that is owned by a business or individual.Hard assets include property, machinery, and cash. These are physical assets that can be used to buy other goods or services.CrowdfundingCrowdfunding means financing a product, idea, or venture using small amounts of money raised from the "crowd," or members of the public. Crowdfunding is typically associated with a large number of individual investors or donors.Crowdfunding initially started when entrepreneurs or organizations would turn to the crowd to raise funds for projects needing funding.Funding would come in the form of donations, though platforms would occasionally offer rewards for different donation levels. Kickstarter, Indiegogo, and Tilt are all examples of donation- and rewards-based crowdfunding platforms.Regulatory changes since the passage of the JOBS Act have allowed equity

crowdfunding to emerge as an alternative to donation-based crowdfunding and a way for investors to earn equity in exchange for providing funding for a project.CircleUp and FundersClub were two of the first general equity crowdfunding platforms, allowing users to invest in companies. Fundrise was the first company in the United States to offer equity crowdfunding for real estate.All investment opportunities open for public equity crowdfunding must first be filed with the Securities and Exchange Commission.Loan-to-Cost Ratio (LTC)The Loan-to-Cost Ratio is the ratio of a loan used to help finance a project compared to the total cost.For example, if a project is expected to cost $1,000,000 and the borrower asks for $700,000, the Loan-to-Cost Ratio would be 70%.Generally, the higher the LTC, the riskier a project is depending on an investment's position in the Capital Stack.A similar metric, the Loan-to-Value Ratio (LTV), compares the amount of the loan to the fair-market value of the project.Unaccredited InvestorAn investor who does not meet the wealth requirements of an accredited investor set forth by the SEC.Unaccredited

investors are typically unable to invest in projects due to government regulations around consumer protection.Fundrise has done three public offerings for unaccredited investors, using Regulation A, and hopes to see the federal government democratize investments in real estate so individuals can share in the profit potential of local projects.