Diving into the world of real estate investing can be daunting, especially when it comes to its vocabulary. As such, for prospective investors, it’s essential to familiarize yourself with some common terms used in the industry.

The following are some crucial real estate investing terms to help you gain confidence and knowledge in your investing endeavors.

Common Real Estate Investing Terms You Should Know

Numerical

  • 1% Rule: This rule states that for a rental property to be considered profitable, its monthly rent should exceed 1 percent of its purchase price.
  • 1031 Exchange: Section 1031 of the US Internal Revenue Code (IRS) allows investors to exchange one investment property for another of a similar type. This can help with deferring capital gains tax, which can save you lots of cash that you can use towards expanding your portfolio.
  • 2% Rule: For an investment property to be profitable, its monthly rent must exceed 2 percent of the purchase price.

A

  • Absorption Rate: This measures how quickly homes sell in a real estate market. In other words, it examines both the supply and demand of homes in a particular area. An absorption rate over 20 percent indicates a seller’s market, while below 15 percent means a buyer’s market.
  • Accessory Dwelling Unit (ADU): A smaller living unit on the same lot as a primary home, which can be attached or detached.
  • Accredited Investor: A person or entity permitted to invest and trade in non-registered private securities.
  • Acquisition Cost: The total cost of purchasing a property. The cost usually includes things like mortgage fees, closing costs, and inspection fees.
  • Active Listing: A property currently listed for sale.
  • Agreement of Sale: A legally binding document with agreed-upon terms, signed by both the property seller and buyer.
  • Airbnb: A property rented on a short-term basis, usually daily.
  • Airbnb Guest: A person staying overnight in a short-term rental property.
  • Airbnb Host: A person or entity renting out spaces on short-term rental platforms.
  • Amortization: A schedule showing how monthly mortgage payments are allocated to interest and principal over time.
  • Apartment: An individual housing unit within a building or an independent dwelling with its own entrance.
  • Appraisal: An objective assessment of a property’s value by a certified professional appraiser.
  • Appraised Value: The objective, professional assessment of a property’s fair market value.
  • Appreciation: The increase in a property’s value over time, either through natural market forces or improvements.

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C

  • Capital Gains Tax: A tax levied on the profit made from selling assets, such as real estate properties.
  • Cap Rate: The ratio of a property’s net operating income to its purchase price. According to many analysts, a good cap rate should fall between 5- and 10 percent. 
  • Cash Flow: The net income remaining after subtracting all expenses associated with a rental property. Examples of expenses include mortgage payments, repairs, maintenance, and taxes. 

D

  • Debt-to-Income Ratio (DTI): The percentage of a person’s monthly income used to make debt payments, such as mortgages, car loans, or credit cards.
  • Depreciation: The decrease in a property’s value over time, often due to wear and tear or market fluctuations.
  • Down Payment: The initial amount paid when purchasing a property, typically a percentage of the property’s total cost.

E

  • Equity: The difference between a property’s market value and the outstanding balance on its mortgage.
  • Escrow: A neutral third party holding funds and documents during the property purchase process, ensuring all terms are met before completing the sale.

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G

  • Gross Rent Multiplier (GRM): A valuation metric found through dividing a property’s purchase price by its potential total annual rental income. A good GRM should fall between four and seven percent. This is an indicator that the property will likely be more profitable. 

H

  • Home Equity Line of Credit (HELOC): This loan allows homeowners to borrow against their home’s equity, typically for home improvements or debt consolidation.

I

  • Investment Property: A property invested in with the intent of generating rental income or appreciation, rather than as a primary residence.

L

  • Leverage: Using borrowed capital or financing to increase the potential return on an investment.
  • Loan-to-Value Ratio (LTV): The ratio of a mortgage loan to the property’s appraised or market value

M

  • Mortgage: A long-term loan from a financial institution, with the property acting as collateral, used to purchase real estate.
  • Mortgage Insurance: A policy protecting lenders from losses resulting from a borrower’s default on their mortgage payment.
  • Multiple Listing Service (MLS): A database of property listings in a region, typically used by real estate agents to share information on available properties.

N

  • Net Operating Income: This is the residual income you get after subtracting property expenses. Common property expenses include utilities, property taxes, and property management fees. 
  • Negative Cash Flow: This occurs when the costs of running a rental property exceed the income. In other words, it shows that the investment is a money pit. 

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O

  • Occupancy Rate: The occupancy rate measures the percentage of occupied rental units compared to available units. 
  • Off-Market Property: This refers to a property available for sale but not publicly listed, marketed, or advertised.

P

  • Passive Income: In real estate, passive income means earning regular revenue from investment properties without much active involvement. 
  • Portfolio: A portfolio consists of all real estate assets and properties owned by an investor. A well-diversified portfolio can offer increased security and higher long-term returns.
  • Positive Cash Flow: Positive cash flow occurs when an investment property generates more income than its operating costs. 
  • Property Management: Property management involves handling the day-to-day tasks related to an investment property. 

R

  • Realtor: A realtor is a real estate agent who adheres to the National Association of Realtors (NAR) standards and code of ethics. Not all real estate agents are realtors.
  • Real Estate Agent: A licensed professional, a real estate agent, assists clients in buying, selling, or renting properties.
  • Real Estate Broker: A real estate broker holds a license that enables them to meet all legal compliance and oversee other agents’ work. 

S

  • Section 8 Housing: This is a government program meant to assist the needy in society. It is entirely handled by the HUD
  • Seller’s Market: This is a market where demand for investment properties exceeds the current supply of properties put up for sale. 

T

  • Tenant Screening: This is a process where landlords check the suitability of prospective tenants based on certain metrics. 
  • Turnkey Property: This is a property that can be bought and immediately rented out to prospective tenants. 

 

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U

  • Mortgage Underwriting: This is a process where lenders evaluate how trustworthy a lender is when it comes to mortgage qualification. 

V

  • Vacancy Rate: This is the ratio of the period a property has been occupied versus when it has been vacant. 

 

Conclusion 

To succeed in real estate investing, understanding these basic terms is crucial. If you still need further clarification or expert help in finding your next investment opportunity, then look no further than Keyrenter Denver.