Are you new in real estate or looking for more understanding of some real estate terms? Here is a list of 30 real estate investing terms that you should know. Whether a beginner or a professional investor.
30 Top Real Estate Investing Terms & Buzzwords to Know
It can be challenging to cope in a new field for anyone, especially where technical jargon exists. You might come across so many words that make you uncomfortable which makes you desire to learn and be part of the team. Such situations can easily discourage and intimidate you to almost giving up.
However, if you take up the task to learn, then it will not be as bad. Today we discuss the real estate investing terms and their definitions that you must know as a beginner.
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List of the Top Real Estate Terms and Buzzwords
Let’s get into the top real estate definitions that you should know as an investor, renter, landlord and more. We will break down these definitions by commercial real estate and residential terms.
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Commercial Real Estate Investing Terms
This is when you defer capital gains that are due from a property sale and reinvest the profits into a different investment property adhering to some certain rules. In the “Internal Revenue Code” section 1031, tax deferral is known as a 1031 exchange.
This is an old tool that has been in use for many years by a large section of the American middle class. Compromising the effects of the 1031 exchange can bring devastating effects to the economy of the United States.
LTV (Loan to Value Ratio)
Loan Value to Ratio is an important term if you plan to seek financial assistance from traditional lenders. Both banks and other lenders use a loan to property value (LTV) ratio to evaluate risks. The higher the LTV ratio is, the higher the risk and interest charged will be.
LTV is calculated by the division of the loan value, by the property value. It is of great importance to know the ratios used and which property value is used by lenders in various computations. Both hard money and private money lenders use different values when assessing the risk to determine the loan amount.
DSCR (Debt Service Coverage Ratio)
Debt service coverage ratio is a formula used by banks or lenders to determine income against expenses on a property you desire to invest in. DSCR indicates the ratio of the property’s expenses in comparison to its total income.
The purpose of DSCR is to ensure that the income from the property is enough or more to cater to new debt.
GRM (Gross Rent Multiplier)
The term GRM is popular with agents in the residential real estate as it helps them to establish how long the property will take to recover its purchase price, from the gross rent it generates.
GRM is arrived at after dividing the price of a property by its annual rent income. Sometimes your real estate agent might explain the investment property through GRM.
It does not depict all the accompanying costs and property ownership benefits. For example, in case you have extra income from on-site activities, then the GRM doesn’t reflect that. It doesn’t reflect all the expenses like property taxes, license taxes, insurance, and maintenance costs.
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Raising Money and Financing Difference
As a real estate investor, you need to understand the difference between these two terms “raising money” and “financing” in relation to real estate investing.
They determine how as an investor, you will fund your investment deals. To raise money, you must reach out to potential investors through emails, cold calls, or diligent networking.
On the other hand, financing means getting a financial institution, lender, or a bank to give you a loan to cover the initial investment. Here, your business strategy determines which of the two methods to go with.
ARV (After Repair Value)
You can decide to buy a house then rent it out or flip the house. The value of any property after improvements and repairs is what we refer to as After Repair Value. Knowing ARV will assist you to determine how much you will pay for a specific house.
Once you buy a property and decide to do minimal improvements on it then rent it out, then its value is not the top in that area.
On the other hand, if you invest more in the property to make it better, then your target ARV will be the highest in the locality.
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This happens when a bank decides to sell a property at a lower amount than their loan balance, to recover money owed by the property owner. It is the bank that approves it and the homeowner has no voice in it.
Buyers who buy any short sale property ought to be ready to deal with several bank’s departments, which might make the deal to take a bit longer than the normal.
Mostly the property is sold for much less than the amount owed on a mortgage.
See Related: Best Books on Flipping Houses
Earnest money refers to an amount or deposit paid in by a buyer to a property’s owner or seller, as a sign of good faith regarding a business deal. It shows the seriousness of the buyer’s intention to see the deal come into fruition.
Physical and Economic Occupancy
Physical Occupancy- this refers to the number of units physically occupied at any given time. Economic Occupancy on the other hand, is the total collective rent potential when the building is fully occupied.
Economic rent is likely to be less than the physical rent due to a few reasons like a less value to a unit agreed to entice tenants. It may be below the expected rent for a unit. Some tenants may also not pay their rent as expected.
Underpayment and evictions may influence the economic occupancy. You may not collect the projected amount of physical occupancy.
A down payment stands for the amount of risk you are ready to put forward in your investment project. This risk is translated into money value to see much the borrower is willing to initially pay for a property.
The reason why this is considered a risk is that, in the event of a loss or foreclosure, the down payment will be the first to go down the drain.
The lender must determine that the borrower is ready to risk a certain percentage of the cost of the property as an initial payment.
Net yield refers to the annual profits on any property after all expenses, divided by the purchase value of the property. You arrive at Net yield by deducting total expenses incurred in owning a property from the gross income then dividing that amount by the purchase price.
These expenses include insurance, annual taxes, management costs, vacancy, and maintenance costs.
See Related: Fundrise vs RealtyMogul – What is Better?
The term “Cash Flow” stands for the total amount that an investor pockets every month after meeting expenses, inclusive of loan payments. It can turn out as negative or positive.
If your expenses are lower than what you earn, your cash flow remains positive. If your expenses are more than what comes in, then your cash flow will be negative.
Capitalization Rate (Cap Rate)
A capitalization rate is a key calculation that helps investors to compare different investments. You calculate it by dividing the annual net operating revenue by the total purchase price.
The total purchase price of a property includes costs such as closing costs and the cost of repairs done after the purchase, which the new owner pays for.
The higher the cap rate is, the better is the investment opportunity.
Cash Flow Before Tax
The term “Cash Flow before Tax,” refers to the net income minus expenses but before income tax. Investors should be mindful of this figure because, if it remains positive, the rest will grow from there.
You can learn this model using the Simple Game by Robert Kiyosaki’s “Cash Flow Game.”
CMA (Comparative Market Analysis)
CMA is the comparison of prices of like properties in a similar locality to determine its value. This is one of the things the real estate investors should be able to do, although real estate agents do it best.
Undertaking CMA involves going into the MLS (Multiple Listing Services) and selecting a property that matches your property.
An investor selects houses similar to the house in question, to help them analyze, determine and ascertain the current value of the house, and it’s value after the repairs. You’ll likely want to compare markets for commercial real estate.
A comparative situation would be when you are doing passive real estate investing. You’ll want to ensure that you are in the right markets to give you some much-needed peace of mind.
Residential Real Estate Investing Terms and Definitions
Every industry has a language that only those familiar with it can relate to, and real estate investing is not different. There are numerous real estate investing terms and buzzwords that could embarrass new real estate investors.
Understanding the real estate investing terms will make your work and association in real estate easier. You will be able to communicate with various real estate professionals with less difficulty and work well.
Here are more terms that you will most probably encounter during your transactions.
Rental property is a term commonly used in real estate and refers to any property that brings the owner monthly rent payments. The payments are from tenants who occupy such a property.
Also, rental property could either be commercial property or residential property.
Also known as short-term rental refers to a self-contained home, a well-furnished apartment, or condominium that offers rental services for short periods.
Rental income is the money tenants pay every month to a landlord for using a property. This is a very common term that you must come across in the real investing journey.
Rental income is an excellent source of stable, passive stream of income.
This can also be referred to as long-term rental and is the most popular form of real estate investment. It is the process whereby tenants rent, and stay in a property for longer periods of time.
Seller’s market is the real estate market in which the supply for a property is less than the demand created by the number of property buyers. Here the property prices are high and tend to be ideal for sellers.
Equity in real estate investment refers to the current value of the property less the remaining mortgage value. The equity value grows as the balance of the mortgage reduces.
Also, equity rises as the market value for the property appreciates.
Cash on Cash Return
Another important term in real estate investing is the “Cash on Cash Return.” This refers to the ratio of total cash flow (before tax) to the overall invested cash. This is usually represented as a percentage. This is a very important metric if you are looking to retire on rental income.
The Buyer’s Market in the real estate industry is a market where the supply for properties is higher than the demand for such properties. This market tends to have lower property prices, which are more ideal for buyers.
Due Diligence Period
Due diligence period refers to a 30 days duration following the receipt of every document in regard to the sale. This is the period when as a buyer, you ought to complete the due diligence on the property to ensure that you have all the information you need about the property.
An appreciation of the property is the rise in the value of an asset over time. Factors that influence this change may include inflation, high demand or weak supply.
Predictive analysis is the ability to predict upcoming trends using historical data. It provides investors with a dependable forecast about the ROI (return on investment) that they can anticipate for, from an investment.
Hard Money Loan
This refers to an asset-based loan from private investors and other organizations whereby, the security is a physical property. These loans are easy to access, although their interest rates tend to be much higher than traditional loans.
See Related: Pros and Cons of Renting vs Selling Your Home
NOI (Net Operating Income)
When we talk of “Net operating income,” it is the annual income that an investment property makes, less all the property expenses.
This term refers to a personal comparison of the monthly repayment of debt to the gross income per month of an individual.
This is a letter that is offered to an investor by a financial institution as a security, that you can be granted a loan when need be. You are issued with this letter as you begin your search for a property or as you do a mortgage application.
It helps to establish what one can afford.
Conclusion on Real Estate Investing Terms
A real estate investor needs to acquaint themselves with the language used in the real estate industry. Although it is a vast field, do your best to familiarize yourself with most terms if not all.
Understanding these real estate investing terms will make your communication effective and also influence your business positively.
If you are a new real estate investor, read this post to familiarize yourself with these terms and they will be of great help to you.
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