The Top Real Estate Investing Terms And Definitions Every Residential Property Investor Just Starting Out Needs To Know
The potential for earning a great deal of money through real estate investments is extraordinary. But in order to really understand the industry and how best to invest your resources, you have to be aware of most of the language being used, and what it really means. Here are some important terms for you to understand, so you can maximize your efforts in real estate investing.
Vacancy rate – the percentage of units which are unoccupied and generating no income.
Tenant screening – the process of finding the best tenants, usually through background checks, reference checks, interviews, and credit checks.
Liability insurance – a policy which protects property owners against claims of bodily injury or negligence which result in damage to someone else.
Single-family home – a free-standing unit which is not connected to any other unit or property, and can be used as a dwelling.
Multi-family home – a unit which can accommodate more than one tenant in a single structure.
Fair Housing Act – a federal law which prohibits the practice of discrimination relative to buying, selling, renting, or financing properties.
Equity – the difference between a unit’s current market value and its outstanding mortgage amount.
Return on investment – the difference between a property’s net profit versus its total acquisition cost.
Capital improvement – any permanent improvement made to a property which increases its value and usage.
Debt-to-income-ratio – a comparison of total monthly debts and total monthly income.
Net operating income – the annual profit brought in by a property after subtracting all associated expenses.
Capital expenses – expenses which are related to property ownership which extend the life or add value to the property.
Adjustable rate mortgage – a mortgage where the interest rate varies, based on the market rate.
Fixed rate mortgage – a mortgage which maintains the same interest rate throughout the life of the mortgage.
Amortization – when an owner pays some part of the principal plus interest each month, so as to build equity in a property.
Escrow – money held in escrow is retained by a third party until buyer and seller can agree on all points of a pending transaction.
Interest – the cost of borrowing money for a mortgage which is paid off each month, along with some portion of the principal.
Real estate broker vs. realtor – a broker assists people with buying and selling properties; a realtor is a member of the National Association of Realtors, and is automatically considered a broker, whereas not all brokers are realtors.
Assessment – determining the actual value of a property, usually for tax purposes.
Appreciation – the increase of any property’s value over a period of time, due to improvements made, increasing demand, etc.
Depreciation – the reduction of a property’s value over time, often because of ordinary wear and tear.
Remote investing – real estate investing where the investor is geographically remote from a property being purchased or sold. While it does not permit a personal inspection of the property, it does allow an investor to become active in an area where opportunity exists.
HOA fee – a fee which is paid by the property owner to an organization which is responsible for community policies, when a property is located within that organization’s jurisdiction.
Building classifications – a method for determining the value, risk, and potential profitability of any potential investment, based on its market value. Class A properties are deemed to present the greatest value, Class B properties are still good but slightly less desirable, Class C properties are generally in less desirable locations, and Class D properties are in fringe locations, often with less than ideal construction.