The Real Estate Investing Terms Every Beginner Should Know
In order to be successful in real estate investing, you need to know the language. Just like any other industry, the real estate world has its own set of acronyms and jargon that can be confusing for beginners. That's why we've put together this glossary of terms - to help you understand what everyone is talking about! So whether you're just starting out or you're a seasoned pro, make sure to bookmark this page and come back to it whenever you hear a term that you don't recognize.
1. Cap Rate - Based on the anticipated profit from a real estate investment, the capitalization rate, or cap rate, is used to calculate the yearly rate of return. In plain English, it's the proportion of net operating income (NOI) to the cost of the asset. The cap rate is computed by dividing the first-year net operating income (NOI) by the cost of the property. If you used financing, loan charges are not included in NOI.
2. Predictive analysis - uses historical data to forecast future patterns. With the help of predictive analytics, real estate investors may make accurate predictions about the return on investment they might anticipate from a specific investment property.
3. Appreciation - An asset's value increases over time through a process called appreciation. The increase may be brought on by a variety of factors, such as rising demand, declining supply, inflation, or changes in interest rates.
4. Adjustable Rate Mortgage (ARM) - A mortgage that doesn't have a fixed interest rate is known as an adjustable-rate mortgage (ARM). However, over the course of the loan, an ARM may change monthly based on the benchmark interest rate, which changes in response to changes in the capital markets. Usually fixed for the first few years, the introductory interest rate then periodically resets.
5. Gross Rent Multiplier (GRM)- Investors analyse rental property options in a particular market using the gross rent multiplier (GRM), a screening metric. The GRM is calculated as the market value of the property divided by the gross yearly rental revenue.
6. Capital Gains Tax - The difference between a property's worth and its purchase price is known as a capital gain or loss. Gains are realised when the asset is sold, if there are any. One year or less is considered a short-term capital gain, whereas more than a year is considered a long-term gain. Both must be reported on income tax returns, but short-term capital gains are taxed at a greater rate than long-term capital gains.
7. Closing Costs - A real estate transaction's closing costs are the fees incurred. Depending on your location, the property you buy, and the loan type you select, these fees change. Inspections, title transfers, loan origination fees, and other expenses all have a cost.
8. Real Estate Owned (REO) - Real Estate Owned (REO) is real estate that has been foreclosed upon but hasn't yet been sold at auction and is owned by the bank or lender. Many banks have repossession departments whose purpose it is to sell the property so that it is no longer on the bank's balance sheet.
9. Equity - Equity is the amount that separates the property's current market worth from the mortgage debt owed by you, the owner.
10. Internal Rate of Return (IRR)- When looking at rental properties or crowdfunding platforms, this is a typical phrase used to describe real estate investments. The internal rate of return (IRR), a metric used to assess a property's long-term profitability, considers both the annual net cash flow and the evolution of equity.
Real estate investors need to be familiar with a variety of real estate investment terms in order to make sound decisions. The definitions provided above are some of the most basic real estate investing terms, but there are many more that you will come across as you continue your real estate journey. If this helps you, save and share this blog with a friend.
