Every industry usually has its own jargon and acronyms. In the real estate industry, there are also several real estate investing terms that you will come across. It is easy for those still new to real estate investing to feel intimidated. Even though it is almost impossible to know all the existing real estate investing terms, there are some common terms that every beginner should know. So, why should you know these real estate investing terms?
Real estate investing for beginners is easier with the knowledge of the common real estate investing terms. They will help you to communicate effectively with other real estate professionals and work more efficiently. You will encounter most of these real estate investing terms in your transactions. Therefore, it will be very helpful if you know what they mean. Let us break down some of the common real estate investing terms that every beginner should know.
Common Real Estate Investing Terms You Should Know
Numerical
1% Rule: According to the 1% rule in real estate, the monthly rent should be equal to or more than 1% of the rental property’s purchase price in order for the investment to be profitable.
1031 Exchange: 1031 Exchange is a tax break referring to Section 1031 of the US Internal Revenue Code (IRC) that allows investors to exchange one investment property with another of the similar type while deferring the capital gains tax on the sale. This is one of the tax benefits of real estate investing.
2% Rule: According to the 2% rule in real estate, an investment property should generate a monthly rent no less than 2% of the purchase price in order to be profitable.
A
Absorption Rate: The absorption rate measures how quickly homes are sold in a real estate market and thus evaluates supply and demand. An absorption rate above 20% usually indicates a seller’s market, while an absorption rate below 15% indicates a buyer’s market.
The formula is: Absorption Rate = Average Number of Sales per Month/Total Number of Available Properties for Sale x 100%
Accessory Dwelling Unit: An accessory dwelling unit is a secondary, smaller living unit located on the same lot as a primary, larger stand-alone home that can be attached or not attached to the primary building. ADU examples include a basement apartment, a granny flat, and a guest house.
Accredited Investor: An accredited investor is a person or a legal entity that is allowed to invest and trade in private securities that are not registered with financial authorities. The requirements include a minimum net worth (usually $1 million) and a minimum annual income (usually $200,000).
Acquisition Cost: The acquisition cost is the total cost of purchasing a real estate property. This includes the mortgage loan fees, the closing costs, real estate commissions, inspections fees, and others.
Active Listing: An active listing refers to a real estate property that is currently listed for and available for sale.
Adjustable Rate Mortgage (ARM): An adjustable rate mortgage is a type of mortgage loan where the interest rate on the balance or the mortgage note changes, or adjusts, over a period of time. There is usually a benchmark on which the interest rate changes, and it does so periodically.
Affordable Housing: Affordable housing is typically defined by the federal government as housing that consumes no more than 30% of a household’s income.
After Repair Value (ARV): The after repair value of an investment property is the estimated market value of a property after upgrades, repairs, and renovation works are completed. It is most commonly used in flipping houses.
Agreement of Sale: The agreement or sale, or the sale agreement, is a legally binding document signed by the property seller and the property buyer in which they agree on the terms of the sale.
Airbnb: Airbnb is the largest short-term rental website with over 7 million active listings owned by more than 4 billion hosts worldwide. Airbnb was established in 2008 by Brian Chesky, Joe Gebbia, and Nathan Blecharcky. Airbnb has also become synonymous with a short-term rental property, or a property rented out on a daily basis.
Airbnb Analytics: Airbnb analytics, or Airbnb data analytics, refers to the gathering, organizing, analyzing, and interpreting of big data on the performance of short-term rental properties to estimate the investment potential of an investment property.
Airbnb Arbitrage: Airbnb arbitrage is a real estate strategy where you rent a long-term rental property and sublet it as a short-term rental. You make profit from the difference between the long-term rental rate that you pay and the short-term rental income that you generate.
Airbnb Calculator: The Airbnb calculator is a tool that collects real estate and short-term rental data from reliable sources, including actual Airbnb rental properties, the MLS, public records, and others in order to analyze it and provide accurate, up-to-date information that can help you make the right investment decision in just a few minutes.
Airbnb Data: Airbnb data refers to qualitative and quantitative information about the performance of individual properties rented out on a short-term basis or entire markets. It can refer to general short-term rental data or be specific to rentals listed on the Airbnb platform.
Airbnb Guest: An Airbnb guest is someone who stays at a short-term rental property overnight.
Airbnb Host: An Airbnb host is a person or an entity that rents out spaces on Airbnb or other short-term rental websites.
Airbnb Laws: Airbnb laws refers to city, county, state, and federal laws and regulations governing short-term rentals in a market.
Airbnb Occupancy Rate: The Airbnb occupancy rate is the ratio of the number of days/nights for which a rental listing is booked by guests divided by the number of days/nights for which it is available for booking.
The formula is: Airbnb Occupancy Rate = Number of Days Booked/Number of Days Available for Bookings x 100%
Airbnb Rental Income: The Airbnb rental income is the monthly income from a short-term rental property. Different properties yield varying Airbnb rental incomes, influenced by the market, the property type, and the season.
Airbnb Rentals/Short-Term Rental (STR): Airbnb rentals, also known as short-term rentals, are a real estate investment strategy where properties are listed on platforms such as Airbnb for brief guest stays, usually lasting a few days. This results in a higher turnover rate among tenants, potentially necessitating increased maintenance and renovations. However, this approach can also yield greater financial returns compared to traditional long-term rentals because of higher rental rates.
Airbnb Review: Airbnb reviews allow hosts and guests to review each other. They include a star rating (between 1 and 5 stars) and a written review (of up to 1,000 words). Airbnb reviews are optional. Multiple, positive guest reviews help listings rank higher and get more bookings.
Airbnb Superhost: The Airbnb Superhost program aims to celebrate and reward the top-rated hosts. To achieve this status, a host needs to have at least 10 stays per year, an overall rating of 4.8 or more, a cancellation rate below 1%, and a response rate of 90%+ within 24 hours.
Amenities: Amenities refer to the extra features, appliances, and items that Airbnb hosts provide with their listings. Some of the most popular amenities include a swimming pool, a hot tub, a fully equipped kitchen, free parking, WiFi, and others.
Amortization: Amortization shows how much of the monthly mortgage payment goes towards the interest and how much towards the principal. When you get a mortgage loan, most of the monthly payment is applied to the interest. As you continue to pay, over time more of your payments will be put towards the mortgage balance.
Apartment: An apartment is an individual housing unit within a residential building (apartment complex) or an independent dwelling within a house with its own entrance.
Appraisal: An appraisal, or a home appraisal, is an objective, professional estimation of a home’s value by a certified, third-party appraiser based on the values of other similar properties in the same market. An appraisal is needed when taking a mortgage loan.
Appraised Value: The appraised value is an objective, professional assessment of the fair market value of a property based on the findings of a certified, third-party appraiser.
Appreciation: Real estate appreciation refers to the increase in the value of a real estate property over time. Natural appreciation happens as a result of market forces such as inflation, increased demand, or weakening supply. Forced appreciation occurs when you make intentional improvements on a property to increase its value.
Available Nights: The number of days/nights for which a short-term rental is made available for booking per month or per year.
Average Daily Rate (ADR): The average daily rate is the average nightly price for which a short-term rental is booked over a given period of time.
B
Bank-Owned Property: A bank-owned property, or a real estate owned (REO) property, is a real estate property that is reverted back to the lender after it fails to sell at a foreclosure auction after the borrower has defaulted on the mortgage payments.
Blocked Night: A blocked night is a day/night for which the Airbnb host makes a listing unavailable for booking by guests. Hosts usually block days/nights for personal use or maintenance.
Booked Nights: The booked nights is the number of days/nights for which a short-term rental property was rented out to guests over a given period of time.
Booking: A booking refers to a reservation made by an Airbnb guest.
BRRRR Method: The BRRRR method is a real estate investing strategy that refers to buying, rehabbing, renting, refinancing, and repeating. This strategy helps investors build a portfolio of rental properties over a relatively short period of time without having much initial cash.
Buyer’s Agent: A buyer’s agent is a real estate agent who represents the buyer in a real estate transaction.
Buyer’s Market: A buyer’s market is a real estate market where the demand for properties for sale is lower than the supply. Property prices are usually low, inventories are big, average days on market are high, and bidding wars are rare, making it an ideal market for buyers. This is also referred to as a cold real estate market.
C
Capital Gains Tax: Capital gains tax is paid on the profit from the sale of a real estate property. The rate depends on the duration of ownership before selling, the taxable income, and the filing status. Short-term capital gains tax is paid when you have held a property for less than 12 months before selling it. The rate is the same as ordinary income tax. Long-term capital gains tax is paid if you have held the property for more than 12 months. The rate can be 0%, 15%, or 20%.
Capitalization (Cap) Rate: Capitalization rate, or cap rate, is the ratio of the net operating income (NOI) produced by an investment property to its purchase price or current market value. It is also a measure of risk in real estate investing. This is one of a few terms that refer to the rate of return expected from an investment property. It is particularly useful for comparing between a few potential markets and a few properties for sale. The main drawback of the cap rate is that it does not consider the method of financing.
The formula is: Cap Rate = Net Operating Income (NOI)/Purchase Price or Current Market Value by 100%
Cash Flow: Cash flow refers to the amount of money that an investor can pocket at the end of each month after the payment of all operating expenses, including loan payments. Cash flow can be positive or negative. If you spend less money on running your rental property than you earn from it, you will have a positive cash flow. If the cash outflows are more than the cash inflows, you will have negative cash flow. You should always aim for positive cash flow properties as, alternatively, you are losing money from your investment.
Carrying Costs: Carrying costs are the recurring costs that property owners need to pay for as long as they own a real estate property. Carrying costs include property tax, mortgage payments, home insurance, HOA fees, utilities, property management fees, and others.
Cash on Cash (CoC) Return: Cash on cash return is the ratio of annual cash flow before tax to the total cash invested, expressed as a percentage. This financial metric allows investors to assess the cash flows from their income-generating assets. Importantly, the cash on cash return considers the method of financing.
The formula is: Cash on Cash Return = Annual Pre-Tax Cash Flow/Total Cash Invested x 100%
Cash-Out Refinance: A cash-out refinance is a mortgage refinancing option that refers to converting equity in a property into cash. In other words, your current mortgage loan is replaced by another, larger mortgage so that you can access the difference in cash.
Class A Building: Class A building refers to a high-end property that has been recently constructed (within the past 10 years) or renovated, that has top amenities, and that is located in a premium neighborhood. Class A buildings are the lowest-risk real estate investments, but they are also less affordable than other classes.
Class B Building: Class B building refers to a generally nice property that was constructed 10-30 years ago, has good features, and is located in an attractive market. Class B buildings strike the right balance between price and risk when investing in real estate.
Class C Building: Class C building refers to an old construction (more than 30 years), with outdated systems, and in a suboptimal part of town. While Class C buildings are affordable, they are risky investments.
Cleaning Fee: Cleaning fee is a one-time fee imposed by an Airbnb host and incurred by an Airbnb guest for cleaning the property after a guest stay.
Closing Costs: Closing costs refer to the amount of money that an investor needs to pay on top of the property price when purchasing a real estate property. These include origination fee, underwriting fee, appraisal fee, title search, title insurance, and others. Closing fees usually range between 2% and 6% of the property purchase price.
Closing Statement: The closing statement is a document that indicates all the costs and fees that the buyer and the seller have to cover during a real estate transaction.
Commercial Real Estate: Commercial real estate refers to properties that are used for business purposes rather than for living or residential purposes. Commercial real estate properties include office buildings, shopping malls, restaurants, hotels, and others.
Comparative Market Analysis (CMA): A comparative market analysis comprises an in-depth report on the current market value of a real estate property based on comparison with comparable, or similar, properties in the same area that have recently been sold.
Condominium (Condo): A condo is an individually owned, independent living unit within a larger residential complex. A condo building is governed by a homeowner’s association which has control over the common areas and facilities. Meanwhile, individual owners have control over most aspects inside their own units.
Contingent Offer: A contingent offer is an offer with a conditional clause that is meant to protect the buyer. It means that the sale will move forward only if a certain condition is met.
Credit Score: A credit score is a numerical expression that evaluates the creditworthiness of an individual based on an analysis of their credit files. It is usually used by lenders to determine if someone qualifies for a loan, the credit limits, and the interest rate.
D
Debt-to-Equity (DE) Ratio: The debt-to-equity ratio measures how much of a real estate property is owed in the form of a loan over how much is owned by the owner.
Debt-to-Income Ratio: The debt-to-income ratio is a personal finance measure used to compare the monthly debt payment of an individual to their monthly gross income. Lenders use this metric to measure the ability of an individual to manage monthly debt repayments.
Debt Service Coverage Ratio (DSCR): The debt service coverage ratio is calculated by dividing the annual net operating income by the annual debt payment.
Depreciation: Real estate depreciation is a form of tax savings where the cost of obtaining and improving a real estate property is deducted over time. For residential properties, the standard recovery period is 27.5 years which is considered the useful lifetime of a property.
Digital Real Estate: Digital real estate refers to any online asset that you can buy, rent, or sell to make a profit. More recently, it can refer to the metaverse where investors can trade with virtual land and properties.
Distressed Property: A distressed property is a real estate property whose owner does not make mortgage payments on time, which puts it at risk of foreclosure or repossession.
Diversification: Investment diversification in real estate refers to distributing your capital among different markets, property types, property classes, and rental strategies in order to maximize long-term profit and reduce risk. A well-diversified portfolio is a low-risk investment.
Down Payment: The down payment on a real estate property is the cash that the buyer puts upfront when purchasing a property. Most lenders determine the minimum down payment as a percentage of the purchase price. For investment properties, the standard minimum down payment is 20% for a conventional mortgage.
Driving for Dollars: Driving for dollars refers to driving around neighborhoods looking for properties for sale or distressed properties that might be available for purchase.
Dual Agent: A dual agent is a real estate agent who works as both the buyer’s agent and the seller’s agent in a transaction.
Duplex: A duplex is a small multifamily real estate property that has two separate living units in the same building. The two units usually share a common floor, but they can have different floor plans.
Dynamic Pricing: Dynamic pricing is an Airbnb pricing strategy where daily rates are constantly adjusted to reflect changes in supply, seasonal demand, major local events, real estate market trends, and other factors. Adopting dynamic pricing can help boost Airbnb occupancy rate, rental income, and return on investment.
E
Earnest Money: Earnest money, or good faith deposit, refers to the amount of money which a buyer puts down before closing on a real estate deal to show the seller that they are serious about the purchase.
Effective Gross Income (EGI): The effective gross income is the potential gross income a rental property can generate including rent, fees, and income from vending machines and other sources minus vacancy and credit costs.
Equity: Equity refers to the difference between the present market value of a property and the amount the owner owes on the property’s mortgage. In other words, this is the amount of the property that you have already paid off and that you own. The value of equity builds up gradually over time as the mortgage balance reduces.
Escrow: Escrow refers to a neutral third party, usually known as an escrow agent, temporarily holding money on behalf of a buyer and a seller until a real estate deal is closed.
F
Fair Housing Act: The Fair Housing Act of 1968 prohibits housing discrimination based on race, color, national identity, religion, gender, familial status, and disability.
Fair Market Value (FMA): The fair market value is the estimated price for which a real estate property can sell in an open market.
FHA Loan: An FHA loan is a mortgage issued by a bank or another financial institution and insured by the Federal Housing Administration (FHA). FHA loans can work for both buying a home and purchasing an investment property as long as the investor meets certain requirements. FHA loans have lower requirements than conventional mortgages.
Financing: In real estate investing, financing refers to the method of securing the necessary funds to purchase an investment property and what percentage of the price is covered by the investor’s own capital.
Fixed-Rate Mortgage: A fixed-rate mortgage is a mortgage loan where the interest rate is locked at a specific value for the entire term of the loan.
Fix and Flip: Fix and flip, also known as flipping, is a short-term real estate strategy where you buy a property (usually in a poor state), renovate it, and resell it to an end buyer. The money you make is the difference between the sale price minus the purchase price and the cost of repairs.
Fixer Upper: Fixer upper refers to a real estate property that is in a poor state and requires a lot of repairs though it is usually in a liveable condition. Fixer uppers are sold at discount rates and hold a strong potential for forced appreciation, which makes them good investment properties.
Flipping: Flipping, also referred to as fix and flip, is a short-term real estate strategy where a house flipper buys a property in a distressed condition, renovates it, and sells it at a higher price. The profit is the difference between the sale price and the sum of the purchase price and the cost of fixes.
Foreclosure: A foreclosure is a legal process that allows the mortgage lender to recover the amount owed to them by the borrower who has consistently defaulted on monthly mortgage payments by taking possession of the property at selling it at a real estate auction.
Fourplex: A fourplex, also known as a quadruplex, is a small multi-family property comprising four individual, separate housing units.
Fractional Ownership: Fractional ownership of real estate assets refers to a few individuals or legal entities owning parts of a property together. Each owner has a deed.
FRBO (For Rent by Owner): FRBO refers to a rental property that is directly managed and rented out by the owner rather than a third-party management company.
FSBO (For Sale by Owner): FSBO refers to a real estate property that is directly being sold by the owner without the help of a real estate agent.
Furnished Apartment: A furnished apartment is a rental property that comes with the furniture provided by the landlord. This is different from long-term rentals and short-term rentals. Furnished apartments can be fully furnished (turnkey), furnished, or semi-furnished.
Furnished Rental: A furnished rental is a medium to long-term rental property that is provided with all the basic furniture needed for the comfortable living of the tenant.
G
Gross Rent Multiplier (GRM): The gross rent multiplier is the ratio of a real estate property’s market value over the annual gross rental income that it generates.
The formula is: GRM = Property Price/Annual Gross Rental Income
Gross Rental Income (GRI): Gross rental income is all the income that an investor earns from a rental property including rent from tenants, additional fees, and income from vending machines or other sources.
Gross Rental Yield: The gross rental yield is the ratio of the gross annual rental income to the property’s market value.
The formula is: Gross Rental Yield = Gross Annual Rental Income/Property Market Value x 100%
H
Hard Money Lender: A hard money lender is a private lender or an investor group that provides short-term loans to real estate investors who typically do not qualify for conventional mortgage loans. They use real estate properties or equity as collateral.
Hard Money Loan: A hard money loan is an asset-based loan issued by private investors or organizations. They are typically quick to fund but have higher interest rates than conventional loans. They have looser qualification requirements than conventional mortgages.
Homeowners Association (HOA): A homeowners association is a private organization that manages the affairs and operations of a real estate development owned by multiple owners, such as a condo building or an apartment complex. The HOA establishes and enforces common rules and takes care of common areas. Owners pay HOA fees for the services provided by the association.
HOA Fees: HOA fees refers to the amount of money that property owners need to pay to the homeowners association on a monthly or annual basis for the services that it provides and for common projects.
Home Equity Line of Credit (HELOC): A home equity line of credit is a line of credit that is secured by existing equity in a real estate property that allows the borrower to take out money up to a certain limit, repay the money, and take out again.
Home Inspection: Home inspection refers to the thorough assessment of the quality and safety of a real estate property when it is being sold/purchased. It is different from an appraisal which is an official valuation of the fair market value of a property conducted by a licensed appraiser when a mortgage loan is being taken.
House Hacking: House hacking is a real estate strategy that gives individuals access to homeownership and real estate investing at the same time. A person buys a small multi-family home to live in one unit and rent out the other units. House hacking gives access to more financing options than traditional real estate investing.
Housing Market: A housing market refers to the current demand for and supply of residential real estate properties in a country, state, city, or neighborhood.
I
Income Property: Income property is a real estate property that is bought with the purpose of generating profit through regular income. This can refer to a short -term or long-term rental property.
Income-Generating Assets: Income-generating assets refers to investments that produce regular, ongoing income. These can include real estate investment properties, stocks, bonds, savings accounts, and others.
Individual Retirement Account (IRA): An individual retirement account is a retirement savings account that individuals earning income can use to save for retirement while enjoying tax benefits.
Inflation: Inflation refers to the increase in the general price level of goods and services. Real estate investing serves as a hedge against inflation because real estate appreciation exceeds inflation in the long term.
Inspection Contingency: Inspection contingency gives a real estate property buyer the right to conduct a home inspection within a specified time and request fixes or cancel the contract, depending on the findings of the inspection.
Internal Rate of Return (IRR): The internal rate of return is a metric used to estimate the value that an investment property generates over its lifetime. It is the discount rate at which the net present value (NPV) of all cash flows from an investment or project is zero. IRR is one of the measures used to evaluate the profitability of an investment property prior to purchase.
Investment Property: An investment property is a real estate property which is purchased with the purpose of earning income, generating long-term profit, or both. A common example of investment properties are short-term and long-term rentals.
Investment Property Analysis: Investment property analysis refers to the gathering, organizing, computing, and analyzing real estate and rental data from reliable sources to estimate the investment potential of a real estate property. This entails calculating various return on investment metrics based on projected income, expenses, and occupancy.
L
Landlord: A landlord is the owner of a real estate property who rents it out to third parties in exchange for remuneration, usually on a long-term basis. A landlord can manage their property on their property on their own or hire a property manager.
Leverage: Leverage refers to the use of a loan to buy a real estate property. This is one of the benefits of real estate investing as investors can use others’ money to earn income and build equity.
Loan Origination Fee: A loan origination fee is a fee charge by a lender for processing a loan. The typical mortgage origination fee is between 0.5% and 1% of the total loan amount.
Loan-to-Value Ratio (LTV): The loan-to-value ratio is the ratio of the loan amount to the appraised value of a real estate property. It measures the risk of lending.
The formula is: Loan-to-Value Ratio = Current Loan Balance/Current Appraised Value x 100%
Long-Term Rental: A long-term rental is an investment property bought for the purpose of renting it out to tenants for a long period of time, usually on a monthly or annual basis. Investing in long-term rentals is the most common real estate investment strategy.
M
Master Lease: A master lease is an agreement under which you lease a real estate property as a single tenant-landlord and sublet it to one or more tenants. The money you make is the difference between the rent you pay to the owner and the rent you collect from tenants.
Mixed-Use Building: Mixed-use building is a real estate property that combines units with different purposes such as residential, commercial, industrial, or entertainment into a single building.
Mortgage: A mortgage is a secured loan provided by banks or other financial institutions to individuals or legal entities to purchase a real estate property. The loan is secured by collateral. There are many different types of mortgages with different terms and durations.
Mortgage Calculator: A mortgage calculator is an online real estate tool that real estate investors can use to evaluate how a mortgage will affect their investment results.
Mortgage Insurance Premium (MIP): Mortgage insurance premium is an amount of money that homebuyers and real estate investors need to pay upfront and on a monthly basis when taking out an FHA loan.
Multi-Family Home: A multi-family home, or a multi-family property, is a building that is designed to house many different families in separate housing units. Duplexes, triplexes, quadruplexes, and apartment complexes are examples of multi-family homes.
Multiple Listing Service (MLS): The MLS is a centralized online database that stores and shows real estate listings and rental listings in a specific US market. Only licensed real estate agents have access to the MLS database.
N
Negative Cash Flow: In real estate investing, negative cash flow occurs when an investment property incurs more costs than the income it generates. This is a poor real estate investment as it means that the investor is losing money.
Net Operating Income (NOI): The net operating income is the income that is generated annually by an investment property after the deduction of property expenses. Such expenses may include property tax, property management fees, and utilities. The NOI is used in multiple return on investment calculations in real estate.
O
Occupancy Rate: Occupancy rate traditionally refers to the number of rented out units divided by the total number of available rental units. In short-term rental property investing, Airbnb occupancy rate measures the number of nights for which a property is rented out divided by the total number of nights for which it is made available for booking by the host.
Off Market Property: An off market property is a real estate property that is available for sale without being publicly listed, marketed, or advertised. Off market properties are not listed on the MLS for sale. Some real estate websites list off market properties. In a different context, an off market property might refer to a property that is not available for sale at the moment.
Open Listings: An open listing is an arrangement under which multiple real estate agents have the right to market and try to sell a real estate property. The owner can also market their property for sale.
Operating Expenses: Operating expenses refers to all the costs and expenses required to own and run a rental property business. These can include things like different taxes, landlord insurance, maintenance, renovations, utilities, property management fees, and others.
Opportunity Zone: An opportunity zone is an economically distressed area of the US where people can invest in exchange for temporary tax deferral. The purpose is to instigate economic growth and job development in underdeveloped areas. Opportunity zones were created by the Tax Cuts and Jobs Act of 2017.
P
Passive Income: In real estate, passive income refers to making regular income from real estate investment properties without being actively involved in the process. Rental properties can turn into a source of passive rental income when you hire a professional property manager.
Pocket Listing: A pocket listing is a real estate property for sale that is not listed on the MLS and other major real estate websites and is instead marketed through alternative methods such as personal networks. A pocket listing is similar to an off market property.
Portfolio: In real estate investing, a portfolio refers to all the real estate assets and properties that an investor owns. Well-diversified portfolios are more secure and tend to bring higher return on investment in the long run.
Positive Cash Flow: In real estate investing, positive cash flow occurs when an investment property generates more money than it requires for operating. A real estate investor should always aim for positive cash flow rental properties in order to make money from real estate.
Pre-Approval: Pre-approval refers to a lender specifying the exact amount which they can lend to a certain borrower after the submission of a mortgage application with various documents. Pre-approval is a commitment on behalf of the lender and speeds up the purchase process.
Predictive Analytics: Predictive analytics is the analysis of big data using historical data to predict future trends. Predictive analytics provide real estate investors with reliable forecasts of the return on investment they can expect from a particular investment property.
Pre-Qualification: Pre-qualification provides an estimate of the loan amount that a borrower can access based on the information they have submitted to the lender. It takes less time than a pre-approval but is also less definite.
Price to Rent Ratio: The price to rent ratio is calculated by dividing the average real estate price in a market by the average annual rental rate. The price to rent ratio evaluates whether buying a home or renting makes more financial sense in a market. A low price to rent ratio is 15 and below; a median price to rent ratio is between 16 and 20; and a high price to rent ratio is 21 and above.
Principal: The principal is the total amount of money owed on a loan excluding the interest.
Private Money Lender: Private money lenders are individuals who invest in real estate projects in exchange for interest. Private money lenders have less strict requirements than conventional mortgage lenders, but the terms can vary widely depending on the understanding between the borrower and the lender. They usually provide short-term loans for the purchase or renovation of real estate properties.
Private Money Loan: A private money loan is a short-term loan provided by individuals to investors to purchase, refinance, or renovate real estate properties. Terms are flexible and depend on the understanding between the borrower and the lender. Properties are used as collateral.
Private Mortgage Insurance (PMI): Private mortgage insurance is an insurance policy that protects the lender against loss in the case the borrower cannot fulfill their mortgage payments. Buyers are usually required to buy a PMI if they pay a down payment that is less than 20% of the property value.
Probate Sale: A probate sale refers to the sale of a home of a deceased person who has not left a will, and the profits are divided between the heirs.
Pro-Forma: Pro-forma refers to an estimation of the potential profitability of a real estate property obtained by combining known and estimated revenue and expenses.
Property Management: Property management refers to the way in which the day-to-day tasks associated with a real estate investment property are handled. Owners can self-manage their properties or hire a professional property manager.
Property Management Fee: :Property management fee is the monthly cost which a professional property management company charges for taking care of an investor’s property. The rate depends on the market, the type of property, the rental strategy, and the included services.
Property Manager: A property manager is an individual or a company that professionally takes care of rental properties on behalf of investors in exchange for a monthly fee. Some of the responsibilities of a property manager include setting rental rates, managing tenants, communicating with investors, maintaining the property, paying bills, and others.
Property Tax: Property tax is a local tax paid on a property by the owner to authorities. Property taxes are calculated as a percentage of the property value. Rates vary by location.
Property Type: A property type is the kind of real estate property. The most common types of residential properties include single-family homes, townhouses, row houses, condos, apartments, duplexes, triplexes, and other multi-family homes.
PropTech: PropTech, or property technology, refers to all the technology-based tools available to real estate investors, agents, brokers, developers, property managers, homeowners, and other players in the residential and commercial real estate industries.
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Quadruplex: A quadruplex, also known as a fourplex, is a small multi-family home that has four separate housing units.
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Realtor: A realtor is a real estate agent who is a member of the National Association of Realtors (NAR). Not all real estate agents are realtors. A realtor must abide by the standards and code of ethics of the NAR.
Real Estate Arbitrage: Real estate arbitrage is the practice of capitalizing on price differences between different real estate markets or properties to generate a profit.
Real Estate Agent: A real estate agent is a licensed salesperson who is qualified to represent buyers or sellers in a real estate transaction. Each state has different requirements to become an agent.
Real Estate Broker: A real estate broker is a real estate agent who holds a broker license allowing them to oversee the work of other agents and ensure all legal compliance. This requires further education and more qualifications than becoming an agent.
Real Estate Comparables (Real Estate Comps): Real estate comps refers to real estate properties that are similar to a property under investigation and located in the same area. Real estate comps form the basis of comparative market analysis and are used to estimate the fair market value of a property.
Real Estate Crowdfunding: Real estate crowdfunding is a relatively new strategy to raise money from numerous small-scale investors to commonly own large-scale real estate properties that are unavailable to individual investors. The process is facilitated by online crowdfunding platforms and gives non-accredited investors access to major real estate developments.
Real Estate Developer: A real estate developer is a professional who manages new real estate developments. Some of the tasks of a developer include finding land to build one, finding and managing staff, overseeing the construction process, and selling properties.
Real Estate Indicators: Real estate indicators refers to numerous numbers and figures that are used to evaluate the potential and expected profitability of a real estate property or deal. Some important indicators include the rental income, operating expenses, vacancy, net operating income, cash flow, cap rate, and cash on cash return.
Real Estate Investment Trust (REIT): A REIT is a legal entity that pulls together the financial resources of multiple investors to own, operate, or finance income-generating real estate assets which are usually commercial properties. Individual investors are rewarded with dividends as well as equity. In the US, REITs were created by Congress in 1960. Access to REITs is traditionally reserved for accredited investors.
Real Estate Listing: A real estate listing refers to a real estate property that is currently listed for sale.
Real Estate Market: A real estate market refers to the supply of and demand for real estate properties in a certain location. This can refer to residential or commercial properties.
Real Estate Market Analysis: A real estate market analysis is a thorough investigation and assessment of multiple factors affecting real estate properties in a certain location. Conducting diligent real estate market analysis is a must when investing in rental properties to ensure that a market provides profitable opportunities for investors.
Real Estate Mutual Fund: A real estate mutual fund is a fund that provides capital to companies to invest in real estate properties.
Real Estate Owned (REO): An REO property is a real estate property that has been repossessed by the bank or another lending institution after the borrower has defaulted on the mortgage payments and has not been sold at an auction. An REO is the same as a bank-owned home.
Real Estate Syndication: A real estate syndication is a formal real estate partnership where a number of investors pool their financial resources together to commonly buy and own a real estate property. A syndicator, or sponsor, holds little to no capital and does the legwork, while investors provide the capital and mark mostly passive income.
Recession: A recession is a major slowdown in economic activity that has a significant impact on the real estate market.
Refinance: In real estate, refinancing refers to replacing an existing mortgage with a new one to extend the term or benefit from a lower interest rate.
Remote Investing: Remote investing refers to investing out of your local real estate market to benefit from more affordable property prices or higher returns on investment. This is usually a hands-off approach and requires hiring a professional property manager.
Rent: Rent refers to the money that a tenant pays to a landlord to live on their property.
Rent Control: Rent control refers to legal regulations imposed by local governments on the maximum rent can landlords can charge in a market or the maximum amount by which they can raise rent over a period of time.
Rent to Own (RTO): Rent to own refers to an agreement between a property owner and a tenant that allows the tenant to buy the property after renting it for a certain time.
Rental Arbitrage: Rental arbitrage is a strategy where you lease a long-term rental property and rent it out on a short-term basis. You make money from the difference between the short-term rental income you get from guests and the long-term rental rate plus operating expenses.
Rental Comparables (Rental Comps): Rental comps are rental properties that are similar to a real estate property under investigation and located in the same area. Rental comps are used to evaluate the potential of an investment property.
Rental Income: Rental income is the money that an investment property owner receives from tenants or guests for occupying their property per month or per year. This is one of the most important metrics when evaluating the expected return on investment on a rental property.
Rental Listing: A rental listing is a real estate property that is currently actively listed for renting on a short-term or long-term basis.
Rental Market: Rental market refers to the demand for and supply of long-term or short-term rental properties in a geographical location.
Rental Market Analysis: Rental market analysis refers to finding, collecting, organizing, calculating, and analyzing real estate and rental data from reliable sources to evaluate the performance of rental properties in a certain location. It is an essential step when buying an investment property to know if it will be profitable based on the performance of existing rental properties there.
Rental Property: A rental property is a real estate investment property that is purchased for the sole purpose of renting it out on a long-term or short-term basis to earn money through rental income. Both residential and commercial real estate properties can be turned into rentals.
Rental Property Analysis: Rental property analysis refers to collecting, organizing, analyzing, and using real estate and rental data from reliable sources to estimate the expected performance of a real estate property as a long-term or short-term rental property. This is a must before investing in a property in order to generate positive cash flow and good return on investment.
Residential Real Estate: Residential real estate are all real estate properties that are used for residential purposes. These include but are not limited to single-family homes, townhouses, and condos, apartments, duplexes, triplexes, and other multi-family homes.
Rental Rate: Rental rate is the amount of money that a landlord or a host charges tenants or guests to occupy their property for a specific period of time, usually on a daily or monthly basis.
Retail Investor: A retail real estate investor is an individual investor who invests in real estate properties for their own personal benefit rather than on behalf of other investors or entities.
Return on investment (ROI): Return on investment, or ROI, is a way to measure how well a real estate investment is doing. ROI shows how much money you make in relation to how much money you have spent or invested in a property.
The formula for ROI is: ROI = Net Profit of Investment/Money Invested
Revenue: Rental revenue refers to the total amount of money that an investor generates from an income property over a month or a year.
Reverse Mortgage: A reverse mortgage is a loan available to homeowners aged 62 years and above that allows them to convert some of their home equity into cash. The home is used as collateral.
Right of Rescission: The right to rescission allows a borrower to cancel a home equity loan and a home equity line of credit and to refinance with another lender within three days of closing.
Row House: A row house is a type of residential real estate property that has multiple levels and shares one or two walls with another row house. Row houses are uniform and can stretch along entire blocks or streets.
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Seasonality: In Airbnb investing, seasonality refers to month-to-month changes in demand from guests in a specific market.
Section 8 Housing: Section 8 housing refers to the federal government’s program to help low-income families, senior citizens, and people with disabilities afford decent housing. The program is funded and managed by the HUD, and the qualifying households’ gross annual income should be below 50% of the median income for the location. Under Section 8 housing, households pay 30% of their monthly adjusted gross income towards rent and utilities, and the remaining 70% is covered by the HUD. This is also known as the Housing Choice Voucher program.
Self-Directed IRA: A self-directed IRA is a type of individual retirement account that allows individuals to save for retirement based on tax advantages using more alternatives (including real estate and privately owned companies) than a regular IRA.
Seller’s Market: A seller’s market is a real estate market where the demand from property buyers exceeds the supply of properties for sale. Property prices tend to be higher and increasing, while days on the market are low. Housing inventory is also low. A seller’s market is also referred to as a hot real estate market.
Short Sale: In real estate, a short sale occurs when an owner who is defaulting on the mortgage payments sells their property for less than what they owe on the mortgage
Short-Term Rental: A short-term rental refers to an investment property that the owner rents out on a short-term basis, usually for less than 30 days at a time. The rental rate is usually set on a daily/nightly basis. This is a recent alternative to the more traditional long-term rental strategy where properties are rented out on a monthly or annual basis. In many markets, short-term rentals tend to be more profitable than long-term rentals.
Short-Term Rental Regulations: Short-term rental regulations refer to all the local, state, and federal laws and rules that govern properties rented out on a nightly basis. They can vary widely between markets.
Single-Family Home (SFH): A single-family home is a free-standing residential building that is not attached to any other dwelling structure and that is meant to host a single family. It frequently comes with a garage and a yard.
Smart Pricing: Smart Pricing is an optional feature provided by the Airbnb platform that allows hosts to automate the dynamic pricing of their listing in a way that optimizes the occupancy rate. The Airbnb algorithm sets rates based on trends in the local market and the rates of rental comps.
Squatters’ Rights: Squatters’ rights refers to the right of someone who is illegally occupying a real estate property to gain possession in case the rightful owner does not take legal actions against them over a certain period of time. In the US, the period varies between 7 and 20 years.
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Tenant Screening: Tenant screening refers to the process implemented by landlords and property managers to evaluate how trustworthy a potential tenant is. The tenant screening process includes income and employment verification, financial and credit check, criminal background check, past rental history, and others.
Timeshare: Timeshare refers to shared ownership of a vacation property by multiple individuals where each owner is allotted a time in the year when they can use the property.
Townhome: Townhome, also known as townhouse, is a multi-floor residential real estate property that shares one or two walls with another townhome. The townhomes in a row do not have to be uniform.
Townhouse: Townhouse, also known as townhome, is a multi-floor residential real estate property that shares one or two walls with another adjacent townhouse. The townhouses in a row do not have to be the same.
Traditional Rental Income: Traditional rental income simply refers to the monthly income that you will be able to receive from renting your income property out to tenants for long-term stays.
Traditional Rental: A traditional rental is a real estate investment property that is rented out on a long-term basis, usually monthly or annual. The rental rate is set on a monthly basis.
Triplex: A triplex is a small multi-family home that comprises three independent housing units.
Turnkey (Turn Key) Property: A turnkey property is a type of residential real estate property that can be purchased and immediately rented out as it has recently been constructed or renovated.
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Underwriting: Mortgage underwriting is the process in which a lender evaluates the trustworthiness of a borrower to determine if they qualify for a loan and how big of a loan they qualify for. The lender bases their decision on the level of risk associated with the borrower.
Under Contract: Under contract means that a real estate property buyer and seller have agreed on the terms of the sale, but the property is not yet considered sold until all contingencies are met.
USDA Loan: A USDA loan is a mortgage loan provided or guaranteed by the United States Department of Agriculture that makes homeownership more affordable in rural areas. USDA loans benefit from less strict requirements than conventional mortgages.
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VA Loan: A VA loan is a type of mortgage loan guaranteed by the US Department of Veteran Affairs available to veterans, serving members, and surviving spouses at favorable terms compared to conventional mortgages.
Vacancy Rate: Vacancy rate is the ratio of the number of days for which an investment property is not occupied over the total number of days for which it is available for rent. This is the opposite of the occupancy rate. Vacancy is considered a cost in real estate investing as it means that investors are losing money. During vacancy, investors need to pay some operating expenses while not generating any income.
Vacation Rental: In real estate investing, a vacation rental refers to an investment property that is rented out on a short-term basis (usually daily) in exchange for remuneration. It is synonymous with a short-term rental and an Airbnb rental. Vacation rentals can benefit from different tax advantages depending on the number of days for which they are used for personal use and the number of days for which they are rented out in a year.
Vrbo: Vrbo is an online vacation rental website where property owners can list their properties and guests can book them. Vrbo is a competitor of Airbnb.
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Wholesaling: Real estate wholesaling is a short-term real estate strategy where the wholesaler acquires a contract from the property seller, markets the property, and eventually assigns the contract to the end buyer. The real estate wholesaler does not own the property at any point. They make money from the difference between the final sale price that the buyer pays and the initial price that the seller receives.
Wraparound Mortgage: A wraparound mortgage is a type of seller financing where the property seller keeps their existing mortgage and lends money to the property buyer instead of the latter taking out a loan from a bank or another financial institution.
The Bottom Line
The above are just some of the common real estate investing terms you will come across as a property investor. Whether you are a beginner real estate investor or just need a reminder, knowing the meaning of these basic real estate investing terms is vital. Of course, there are more real estate investing terms that you will come across as you continue to learn real estate investing. But you have to start somewhere!