For new real estate investors, understanding jargon like amortization, acquisition costs, and appreciation, can be quite overwhelming at first.
In order to overcome this pain point, we have broken down some of the most common real estate investment terms & definitions. By acquainting these jargons you will definitely be able to own, buy, or rent, properties like a pro.
Real estate investment terms when buying properties
1. Appraisal
Appraisal is a lender-determined value of a property. The lender conducts the property’s survey independently to gauge and authorize the conditions and market value. And when you apply for a bank loan to buy the property, the bank evaluates if they are lending you the right amount of money.
2. Building Classification
Buildings are generally classified on the basis of their age, assessed value, expected rental returns, and risk involved.
- Class A properties have the highest assessed value, highest rent, lowest risk, are newly built, and are less than 10 years old.
- Class B units are located in good neighborhoods, have a low risk, and are 10 to 25 years old.
- Class C buildings are usually over 25 years old and have a lower assessed value.
- Class D apartments are over 30 years old and are located in below-average suburbs with the lowest assessed value and highest risk.
If you are a new property investor, it is recommended that you purchase a Class A, B, or C property, as all of them have a lesser risk.
3. Comparative Market Analysis
Comparative market analysis refers to the estimated value of your property. This research involves evaluating other units that are similar in size, age, location, style, and construction to your apartment. This enables you to quote a competitive price to the seller.
4. Acquisition Cost
This is the cost or a set of expenses incurred to acquire the property. This includes mortgage, inspection fees, costs incurred while obtaining title insurance, charges from credit reports and deed record fees, among others.
Real estate investment terms for understanding debts while buying
1. Interest
This refers to the rate the lender sets for the cost of borrowing money over a loan period.
2. Adjustable-rate & fixed-rate mortgages
With an adjustable-rate mortgage, the rate of interest can vary over an interval period of five or ten years. This is considered risky for property owners who have rented out a unit for more than a few years. This is because the rate can increase based on market conditions. Conversely, the interest does not change throughout the loan for mortgages with fixed rates.
3. Amortization
Amortization is the method of paying off the debt through scheduled installments. These EMIs are inclusive of principal and interest.
4. Escrow
It is a contractual agreement that involves the creation of a third-party account that holds the finances a buyer will pay to the seller. The property investor deposits periodic payments to this temporary account so that the lender/bank pays for the mortgage and insurance.
Real estate investment terms when owning properties
1. Assessed value
Based on the city or state tax you owe for the property you own, the assessed value is the tax worth. Only a public tax assessor determines it.
Assessed value refers to the annual estimation of a property’s worth. This rate is based on the tax district of the city or county. A municipal assessor is responsible for determining it, after s/he reviews the neighboring property values.
2. Appreciation & Depreciation
Appreciation refers to the increase in the value of your property over a period of time. In contrast, when the property value decreases, it is called depreciation.
Real estate investment terms while evaluating finances
1. Equity
Equity refers to how much of the property you own after paying the principal amount. For instance, if you own a $400,000 property, and owe the bank $100,000, you have $300,000 in equity.
2. Return on investment (ROI)
It is a financial ratio calculated by dividing the net income by the initial investment cost of a property. This helps in evaluating the returns generated by the investment.
3. Net operating income (NOI)
The real estate term NOI is exclusive of taxes, amortization, principal, and interest payments along with all other operating expenses. It is used to determine the annual profitability of the investment that is subtracted from the operational costs.
Real estate investment terms while renting properties
1. Vacancy rate
Vacancy rate is the percentage of the total number of your rental units that remain uninhabited for a period.
2. Tenant Screening
This refers to the process of securing reliable tenants by conducting interviews, cross-checking credit and reference histories along with finding criminal records, if any.
3. Property Management
When you have multiple units for rent, a property management company can handle all day-to-day operations. From fulfilling maintenance requests to evaluating the market trends, professional management will save you time..
Advantage of knowing real estate investment terms in California
California’s real estate market shows no sign of slowing down. Property appreciation with lower mortgage rates is here to stay. So, start investing with the knowledge of the helpful jargon explained above and consult Beach Front Property Management for much more.
