Creative Finance Glossary

Buy, Rehab, Rent, Refinance, Repeat. You buy a distressed property at a discount, fix it up, rent it out to establish rental income, then do a cash-out refinance to pull your invested money back out. With the cash recycled, you repeat the process on the next deal. Done right, you can build a rental portfolio without tying up more and more of your own money with each deal.

Buying a property "subject to" the seller's existing mortgage staying in place. You take title to the property, but the original loan stays in the seller's name. You make the monthly mortgage payments directly. This lets you acquire a property without qualifying for a new loan and — critically — without losing the seller's existing interest rate, which may be much lower than current market rates.

Instead of going to a bank, the seller acts as the lender. You make monthly payments directly to the seller based on an agreed price, interest rate, and term. The seller gets a steady income stream instead of a lump sum. You get a property without needing traditional bank financing. Win-win — especially for sellers who don't need cash immediately and buyers who can't or don't want to qualify conventionally.

A lease option gives you the right — but not the obligation — to purchase a property at a set price within a set time frame, while you lease it in the meantime. You pay an option fee upfront for this right. If you (or a tenant-buyer) exercise the option, the fee often applies toward the purchase price. If the option expires unused, the seller keeps the fee. Investors use lease options to control properties with little cash and profit multiple ways: through rental income, option fees, or assignment.

A wrap mortgage is a form of seller financing where the seller creates a new, larger mortgage that "wraps around" their existing loan. The buyer makes one payment on the wrap mortgage to the seller. The seller then continues paying their underlying lender and pockets the difference — the "spread" — between the rate they charge the buyer and the rate on their existing loan. The seller profits on both the rate spread and the difference in loan balance.

A wholesaler finds a motivated seller, gets a property under contract at a discount, then assigns (sells) that contract to an end buyer — typically a fix-and-flip investor or landlord — for an assignment fee. The wholesaler never actually buys the property. They make money by finding and negotiating the deal, not by owning real estate. The key is finding properties at enough of a discount to leave room for the end buyer's profit and your fee.

The estimated market value of a property after all planned renovations are complete. ARV is not what the property is worth right now — it's what it will be worth once it's fixed up. ARV drives the BRRRR method: lenders typically refinance at 70–75% of ARV, so the higher your ARV, the more equity you can pull out. You determine ARV by looking at recent sales of comparable properties (comps) in the same area.

Your annual pre-tax cash flow divided by the total cash you invested, expressed as a percentage. If you put $30,000 into a deal and it produces $3,600/year in cash flow, your cash-on-cash return is 12%. This is the single most important metric for evaluating a buy-and-hold real estate deal because it tells you how hard your invested dollars are working for you each year.

Gross rental income minus all operating expenses — but before mortgage payments (debt service). Operating expenses include property taxes, insurance, property management, maintenance, vacancy reserve, and repairs. NOI tells you how much money the property itself produces, independent of how it's financed. A higher NOI means a more profitable property.

Net Operating Income divided by the property's current market value (or purchase price), expressed as a percentage. A property with $12,000 NOI that sells for $150,000 has an 8% cap rate. Cap rate is most useful for comparing investment properties on an equal footing — it tells you the return you'd get if you bought a property with all cash and no mortgage.

The difference between two interest rates in a creative finance deal. In a wrap mortgage, the rate spread is the difference between the wrap rate (what the buyer pays) and the underlying rate (what the seller owes). This spread is how the seller profits from a wrap deal. A 2–3% spread is generally considered solid; less than 1% is thin and may not be worth the risk.

The loan amount divided by the property's value, expressed as a percentage. A $120,000 loan on a $150,000 property is an 80% LTV. Lenders use LTV to assess risk — higher LTV means more risk. In the BRRRR method, most lenders will refinance up to 70–75% of ARV, which is the key constraint in determining how much cash you can pull out.

Net Operating Income divided by total debt payments (principal + interest). A DSCR of 1.0 means the property's income exactly covers the mortgage payment. Most lenders require a DSCR of 1.20–1.25 or higher, meaning the property generates 20–25% more income than needed to cover the debt. Creative finance investors often use DSCR loans (which qualify based on the property's income, not your personal income) for refinancing BRRRR deals.

The process of paying off a loan through scheduled payments over time. In a fully amortized loan, each payment covers interest plus a portion of the principal, and the loan reaches a zero balance at the end of the term. In the early years of a mortgage, most of each payment goes toward interest. As the loan ages, more goes toward principal. A 30-year amortized mortgage at 7% will be mostly interest for the first 10+ years.

A large lump-sum payment due at the end of a loan term. Common in seller-financed deals and wrap mortgages. Example: a seller might agree to carry a note for 5 years with payments calculated on a 30-year amortization, with the full remaining balance due as a balloon at year 5. The buyer plans to either refinance or sell before the balloon comes due.

A provision in most conventional mortgage contracts that allows the lender to demand full repayment of the loan if the property is sold or the title is transferred without the lender's permission. This is the primary legal risk in subject-to and wrap mortgage deals — if the lender discovers the transfer and enforces the clause, the entire loan balance could be called due immediately. Most lenders don't actively monitor for this, but it's a real risk that every investor must understand.

The legal document in which a borrower promises to repay a loan under specific terms — including the loan amount, interest rate, payment schedule, and maturity date. In seller finance and wrap mortgage deals, the promissory note is what the buyer signs to document the debt to the seller. It is secured by the property through a mortgage or deed of trust recorded against the title.

The legal document that creates a lien on a property as security for a loan. If the borrower defaults, the lender can foreclose on the property to recover the debt. In most western states, a deed of trust is used instead of a mortgage — it involves three parties (borrower, lender, and a trustee). Functionally they work the same way. In creative finance, the seller becomes the lender in a seller-financed deal and records a deed of trust to protect their interest.

Principal, Interest, Taxes, and Insurance — the four components of a standard monthly mortgage payment. Principal pays down the loan balance. Interest is the cost of borrowing. Taxes are property taxes (often escrowed). Insurance is homeowner's insurance (often escrowed). When analyzing a deal, make sure you're using PITI as your mortgage cost — not just principal and interest — or you'll underestimate your expenses.

The difference between a property's market value and what is owed on it. If a property is worth $200,000 and has a $130,000 mortgage, there's $70,000 in equity. In creative finance, equity is often the key motivator for sellers — they may be willing to accept creative terms (seller finance, lease option) in exchange for getting their equity out over time rather than in a lump sum, which can have tax advantages for them.

The upfront payment a buyer makes to a seller in exchange for the right to purchase the property within a set time frame. In a lease option, the option fee gives you the right to buy — but not the obligation. If you exercise the option, the fee typically applies toward the purchase price. If you don't, the seller keeps it. For investors, the option fee is often much lower than a down payment, making lease options a low-cash-in strategy.

Transferring your rights in a purchase contract or lease option to another buyer for a fee. You get a property under contract, then assign (sell) your position to an end buyer before closing. You never take title — you just sell your right to buy. The assignment fee is your profit. This is the core mechanic of wholesaling and is also used in lease option assignments.

A seller who needs to sell for reasons beyond just wanting top dollar — job relocation, divorce, inherited property, financial distress, behind on payments, deferred maintenance they can't afford to fix, or simply wanting to avoid the hassle of listing. Motivated sellers are the foundation of creative finance deals because they're often willing to accept non-conventional terms (seller financing, subject-to, lease options) in exchange for a faster, simpler sale.

Recent sales of similar properties in the same neighborhood used to estimate a property's market value or ARV. A good comp is similar in size, age, condition, and location, and sold within the last 3–6 months. Real estate agents can pull comps from the MLS. Investors also use Zillow, Redfin, and county tax records. Accurate comps are the foundation of any deal analysis — if your ARV is wrong, every number that depends on it is wrong.

The process of verifying all material facts about a property and deal before closing. In creative finance, due diligence includes reviewing the existing mortgage terms, checking for liens or judgments, verifying title, inspecting the property's physical condition, confirming insurance can be obtained, and analyzing the rental market. Skipping due diligence is the fastest way to turn a great-looking deal into a financial disaster.

The amount of time a lender requires you to own a property before they'll refinance it. In the BRRRR method, this is critical — many conventional lenders require 6–12 months of seasoning before they'll do a cash-out refinance. DSCR lenders often have shorter or no seasoning requirements. When underwriting a BRRRR deal, always know your lender's seasoning requirements upfront so you're not surprised by a longer hold period than expected.

Legal ownership of a property. A "clear title" means there are no outstanding liens, encumbrances, or ownership disputes. A "clouded title" means there are unresolved issues — unpaid taxes, mechanic's liens, old mortgages not properly released, disputed ownership — that can prevent a sale or refinance. Always order a title search (and buy title insurance) before closing on any property. This is especially important in subject-to deals where the title is transferring while an old mortgage remains.