A Beginner’s Guide to Real Estate Jargon
If you are just starting out as a property investor, hearing a lot of complex terminology can be intimidating. If you want to get the best prices on a given property, you need to understand what the sellers are talking about in order to present yourself confidently. This list from Utopia Property Management will give you the run-down on the most important real estate investment terms to know when getting into the field of investing.
Terms Concerning the Decision to Purchase
Acquisition cost: The all-inclusive total price of an investment property. This includes the property value as well as closing costs, inspection fees, mortgage, and more.
Appraisal: The property value as determined by an appraiser, or an independent lender that conducts a survey to assess the condition of the property considering similar property listings.
Building classifications: A categorical system indicating the profitability, risk, and value of a property based on the market value. Classifications move from class A, the most desirable property in terms of value and risk, to class D, properties with significant location or condition issues. Lower class properties have the highest opportunity for return of investment due to their low cost.
Comparables and comparative market analysis: A process during an appraisal that compares values of similar property sales with close proximity and recency.
Dollars per square foot: This calculation allows for easy comparisons of differently sized properties. It is usually applied to a combination of acquisition costs, operational costs, and loan costs.
Inspection contingency: This term within the purchase agreement allows the buyer to hire an independent inspector to conduct another property inspection and negotiate price with the seller or fully terminate the purchase agreement based on the inspection report.
Loan-to-value ratio (LTV): For lending properties, this determines the overall risk by comparing loan size to property value. Higher ratios mean higher risk.
Rehabilitation: This refers to the necessary repairs or renovations to be completed in order for a property to be ready for tenants or resale.
Turnkey property: A property that is updated to market standards and requires no renovation to be rented to tenants.
Terms Concerning Buying and Debt
Adjustable-rate mortgage: A mortgage in which the interest rate fluctuates depending on market conditions.
Escrow: A third-party temporary financial account that holds the money that will be used to pay for a property until all negotiations are completed. It also can be used to make payments on behalf of the buyer to indicate that funds are available.
Proof of funds: An official statement from a financial institution declaring that the buyer has sufficient funds to proceed with a purchasing offer.
Short sale: A real estate transaction in which the property is sold for less than what is owed on the mortgage, requiring formal consent from the lender.
Terms Concerning Ownership
Appreciation: A property’s increase in value over time, which can be due to physical property improvement or changes in the market such as inflation, increased demand or decreased supply.
Assessment: The process to determine the value of a property for tax purposes.
Depreciation: A property’s decrease in value over time, which can be due to physical property deterioration or damage, or changes in the market.
Property management: A third-party organization or individual (like us!) that oversees the daily operations of a rental property.
Terms Concerning Financial Assessment
Capital improvement: Any improvement made to a property that increases its value, including renovations, repairs, new appliances, etc.
Carrying costs: A category of expenses involved in rehabilitating and maintaining a property that an investor must consider from the time it is purchased until the time it is sold.
Cash flow: The net income a rental property generates after considering property expenses and loan payments; cash flow can be negative.
Equity: The overall value of a property to the owner considering the current mortgage amount; the difference between the current market value of the property and the mortgage balance on the property.
Net yield: The measurement of annual earnings of a property after all expenses are deducted.
Principal reduction: The portion of a mortgage payment that is paying back the money borrowed, not the added interest.
Return of investment (ROI): This term can be used in reference to any type of investment; it is the ratio of the net profit an investment will produce to the total acquisition cost.
Terms Concerning Renting
Leasing fee: The payment a property manager receives from the owner when a tenant signs a lease for the property.
Liability insurance: A type of insurance that protects the property owner against claims made by renters concerning negligence or action that results in property damage or injury.
Long-term rental: A rental in which the tenant signs the lease for a period of a year or longer; this is the most traditional type of rental property.
Short-term rental: A rental in which the tenant signs the lease for a short period of time, usually a month to a few months.
Tenant screening: The process of evaluating a potential tenant before a lease is signed; this process includes interviews, background checks, calling references, and more.
Vacancy provision: A portion of funds used to cover expenses while a rental unit remains vacant, or not producing income.
Vacancy rate: A percentage indicating the number of unoccupied units in a rental property at any given time.