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
1. Rental Property
This is one of the most common real estate investing terms. It refers to a type of property from which the owner receives a monthly payment from the occupants (tenants) for using or occupying the property. Rental properties may be either residential real estate or commercial real estate.
2. Short-Term Rental (Vacation Rental)
A short-term rental is a furnished and self-contained home, condominium or apartment that is rented out for short periods of time. Airbnb property is a common example.
3. Long-Term Rental (Traditional 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. Investing in long-term rentals is the most common real estate investment strategy.
4. 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. The value of equity builds up gradually over time as the mortgage balance reduces and the property’s market value appreciates.
5. Rental Income
Rental income is the money that is periodically paid by the tenant to the landlord for using the landlord’s property. This is also one of the most common real estate investing terms that you will encounter in your investment journey.
6. Cash Flow
Cash flow refers to the amount of money that an investor can pocket at the end of each month after payment of all operating expenses, including loan payments. Cash flow can be positive or negative. If you spend less money than you earn, you will have a positive cash flow. If the cash outflows are more than the cash inflows, you will have negative cash flow.
7. Pre-Approval Letter
A pre-approval letter is a letter offered by a bank before you start looking for a home or apply for a mortgage to determine what you can afford. It assures home sellers that you can be granted a loan when needed.
8. Seller’s Market
This is a real estate market where the demand from property buyers exceeds the supply of property for sale. Property prices tend to be higher and more attractive to sellers.
9. Buyer’s Market
This is a real estate market where the demand for properties for sale is lower than the supply. Property prices are usually low, making it an ideal market for buyers.
Related: Is It a Buyer’s Market or Seller’s Market?
10. Appreciation
Appreciation is an increase in the value of a real estate property over time. The increase in value may be due to a number of reasons such as inflation, increased demand, or weakening supply.
Related: How to Calculate Real Estate Appreciation
11. 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.
Related: The Use of Predictive Analytics in Real Estate Investing
12. 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.
13. Net Operating Income (NOI)
Net operating income is income that is generated annually from an investment property after deduction of property expenses. Such expenses may include property tax, property management fees, and utilities.
14. Debt-to-Income Ratio
This 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.
15. Cash on Cash 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.
16. Cap Rate
Capitalization rate or cap rate is the ratio of the net operating income produced by an investment property to its capital cost or current market value. This is one of a few real estate investing terms that refers to the rate of return expected from an investment property. Beginners should make sure to study each one and understand the major differences between them.
17. 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 interest rate.
18. Off-Market Property
An off-market property is one that has been sold or is in the process of being sold without any public knowledge or advertisement. Off-market properties are not listed on the public MLS for sale.
19. Internal Rate of Return
Internal rate of return is the discount rate at which the net present value (NPV) of all cash flows from an investment or project are zero. This metric is used to estimate the profitability of potential investments.
20. Real Estate Agent
A real estate agent is a licensed professional that represents sellers or buyers in real estate transactions. This is usually the starting point for most real estate professionals. A real estate agent usually works under a licensed broker.
21. Realtor
A realtor is a person who acts as an agent in real estate transactions and is a member of the National Association of Realtors. A realtor must abide by the standards and code of ethics of the association.
22. Real Estate Broker
A real estate broker is a licensed professional who represents buyers and sellers of real estate and can work independently.
23. Rental Property Calculator
A rental property calculator is an online tool that helps property investors to determine the return on investment, cash flow, and cap rate on a rental property. Investors put in basic information about an investment property such as purchase price, property expenses, and financing. This tool is typically used to evaluate and decide if a rental property is a good investment before purchase.
Mashvisor’s Rental Property Calculator
Try out Mashvisor’s right now.
24. Single-Family Home
A single-family home is a free-standing residential building. It is not attached to any other dwelling structure.
25. Multi-Family Home
A multi-family home is a building that is designed to house many different families in separate housing units. Apartment buildings, duplexes, and townhomes are examples of multi-family homes.
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!
To learn more real estate investment terms and find answers to your questions, be sure to read Mashvisor’s real estate investment blog.
