Whether you are new to real estate investing or are a veteran of the industry, it’s good to keep fresh on common terms that often come up. Here are a few:
- Capitalization (cap) rate: A ratio between net operating income and purchase price.
Net operating income (NOI): Refers to a measure of the potential property of a real estate investment to be profitable.
- Cash flow: Amount of the money left at the end of a month after paying all operating costs.
- Cash-on-cash-return: A measure of yearly return about money put down. It is expressed as a percentage.
- 1031: Sellers of investment property should pay capital gains taxes at sale time. Section 1031 of the U.S Internal Revenue Code allows taxpayers to defer payment dates in exchange for certain property types.
- HOA fees: An amount charged by homeowner′s association to members within their jurisdiction to maintain and improve properties.
- Gross Rental Yield: Total income from a property divided by buying price of a property and the associated closing costs before deducting operating costs.
- Appreciation: An increase in property value of a property over time. Appreciation is the opposite term to depreciation.
- Adjustable-Rate Mortgage (ARM): A mortgage without a fixed interest rate so can change monthly.
- Fixed-rate mortgage: This means a mortgage with a defined rate of interest that never changes during the loan time.
- Capital Gains Tax: Difference in the value of the property from the purchase price. Gain realized after selling an asset.
- Debt-to-Equity Ratio: Much of ownership to determine the value belonging to the owner and the amount it owes in debt.
- Escrow: The act of holding something of value by a third party during a transaction. In real estate, it means a portion of down payment by a property buyer that an impartial third party holds in a separate bank account until the end of contract negotiation and closing the deal.
- Closing costs: Closing cost is the fees paid at the end of real estate transactions depending on the property, location, and type of loan.
- Internal Rate of Return (IRR): Measurement of the long-term profitability of a property, taking the annual net cash flow and change in the equity over time into account.
- PMI (Private Mortgage Insurance): An extra insurance that lenders charge to borrowers who make a down payment of less than 20 percent. PMI ensures or protects the lenders if a borrower defaults. It usually costs 0.5% -1 % of the total loan amount.
- Real Estate Owned (REO): Property owned by a bank or lender after a foreclosure but not yet sold in an auction.
- Commercial Real Estate (CRE): Income-producing property falls into the land, retail, industrial, special use, and multifamily apartments.
Investors in real estate should learn the real estate investing terms so that the process is not intimidating.