Real estate investing like all other forms of investing requires knowledge of its keywords and terms. When an investor decides to get involved in a real estate investment property, it is considered necessary to understand the concept words they will face on a regular basis. The idea is to learn real estate investing while being a part of it. Understanding the terms and lingo used mostly by investors, real estate agents and sellers is important for your investment so that you can keep up with all the important details.
To learn real estate investing is the step that comes before anything basically. It is even the step that precedes making a study plan of the investment you intend to pursue. Logically, you can’t make a detailed investment study without having the knowledge to understand the basic terms that are part of the real estate investment package. These terms are mostly about real estate, finance, economics, marketing and taxation. So they are, in other words, the foundation of your investment.
Not putting an effort to learn real estate investing before becoming an investor will not only cause delays or misunderstandings but it can also lead to financial losses. Lets consider an investor who doesn’t understand what capitalization rate, or “cap rate”, means. The cap rate is an important indicator of real estate investing because it shows you the potential return on an investment in percentage rates. So if an investor has already invested their money without understanding and evaluating the cap rate of that property, it might lead to them to having a wrong perception. What might seem like a good deal, could actually be a money pit.
8 Important Real Estate Terms To Know
- Cap Rate: It is a percentage rate that shows the profit that will be generate from an investment property in correlation to the initial investment made. For example, an investment of $200,000 with a potential return of $20,000 on the investment equals a cap rate of 10%. Cap rate is important to understand how much of your investment price will be coming back to your pocket annually.
Related: Investment Property Returns Dictionary
- Appreciation: The opposite of depreciation, which most people are familiar with. It is basically the increase in the value of an investment property over a certain amount of time. Appreciation is mostly affected by increased demand for properties, shortage of properties and inflation in prices.
- Operating Expenses: This term is incredibly important for investors who are going down the path of short-term rental investments. Understanding operating expenses can give you a better indication of how much money your property will earn overall. Operating expenses are the costs that keep the property in service, like taxes, insurances, maintenance, renovations and utilities.
- Net Operating Income: It is the amount of income that the investor will collect annually. NOI is the final calculation for the investor to understand the profit they will be making after taking into account operational expenses, vacancies and credit losses.
Related: Is it OK to Break-Even on a Real Estate Investment Property?
- Agreement of Sale: It is a document that is sent by the buyer to a seller of an investment property detailing the price and conditions of the sale of that particular property.
- Remote Investing: The term refers to property investing in an area where the investor is not located geographically. It is the online version of investment property purchases in any location desired. Remote investing gives investors the chance to buy properties at a lower cost for a higher profit return, considering location and demand.
Related: Out-of-State Real Estate Investing: The Good and The Bad
- Right of Rescission: Basically, it is the amount of time that a potential investor has in which they have the right to cancel a loan agreement before it becomes enforced by law.
- Closing Statement: The final agreement document between buyer and seller which indicates all details and agreements made on the sale of property from one party to the other.
It is not hard to learn real estate investing terms like the ones mentioned above. There are many more for an investor to understand before making their first step into the real estate market. What is certain, is that understanding the terms mentioned would give the investor a new dimension of understanding real estate in pure business terms and to not fall on the sword of ones own ignorance.
Check out Mashvisor’s Youtube channel to see these terms described using visuals, such as cash on cash return and cash flow.