MAKING SENSE OF REAL ESTATE INVESTMENT TERMS

real estate investment terms

Let’s discuss the topic of real estate investment terms.  Like any other industry, the real estate investing world has its own unique terminology and lingo.  As a newbie real estate investor, it won’t take long before you feel like you’ve entered an entirely different language.  However, fear not.

In this post, I’ve included some of the commonly used real estate investment terms that aren’t widely understood.  Master them, and you’ll be ranting like a veteran investor in no time.

After-Repair Value (ARV)

After-repair value is simply the value of a property post-renovation.  Knowing how to calculate ARV will require the help of an experienced real estate agent or contractor until you get a feel for property values.  

Appreciation

Appreciation refers to the increase in a property’s value over time.  

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Buy & Hold

Buy & hold refers to properties that are held long-term by a real estate investor.  The term is usually used when referring to rental properties.

CAP Rate

CAP Rate, aka Capitalization Rate, is a percentage that some investors use to determine the potential rate of return on an investment property.  The formula is CAP Rate = NOI / Current Market Value of a property. The higher the CAP rate, the more potential a property has. Determining a “good” CAP rate fluctuates depending on the market, location and property type.

Cash Flow

Cash flow is simply money that comes in from rent.  When you’ve got more coming in than going out, you’ve got positive cash flow.  When the opposite is true, you’ve got negative cash flow.

Cash-On-Cash Return (CoC)

Cash-on-cash return is a percentage that is calculated by using the following formula: annual before-tax cash flow / total cash invested.  For more information on CoC, click here.

Clean Title

A clean title basically confirms two things: the seller has legal ownership and the ability to sell, and there will be no liens or levies from creditors remaining on the title once legal title is passed to the buyer.

Clouded Title

A clouded title is the opposite of a clean title.  Here’s is Wikipedia’s definition of a clouded title, “In United States property law, cloud on title or title defect refers to any irregularity in the chain of title of property (usually real property) that would give a reasonable person pause before accepting a conveyance of title. According to Investopedia, a cloud can be defined as: “Any document, claim, unreleased lien or encumbrance that might invalidate or impair the title to real property or make the title doubtful.”

Contingency

A contingency refers to certain conditions that must be met before a real estate transaction can finalize.  There are three main contingencies: appraisal, property inspection and mortgage approval.

Debt Service

Debt service refers to the amount of debt (mortgage) against a piece of property.

Depreciation

Depreciation is an accounting convention that allows a company to write off an asset’s value over time.  For more on depreciation, click here.

Distressed Property

A distressed property is just another real estate investment term for a “fixer upper.”

Earnest Money

Earnest money is money paid to a seller in a real estate transaction to confirm the buyer’s good faith in the agreement.  Earnest money deposits are often non-refundable.

For-Sale-By-Owner (FSBO)

FSBO properties are properties for sale that are not represented by a real estate agent.  The owner is attempting to sell the property themselves.

Gross Operating Income (GOI)

GOI simply represents all income from a property.  This could be just rent, but, depending on the property, GOI may include vending machines, coin laundry, parking etc.

Gross Rent Multiplier (GRM)

GRM looks at how long it would take to pay off a piece of real estate solely considering gross annual rent (rent not including expenses).  The formula is sale price / gross annual rent.

Here’s a simple example: a property is purchased for $100,000, and the gross annual rent is $10,000, so the GRM is 10.

Loan-To-Value (LTV)

As the term suggests, loan-to-value is the percentage of the loan amount on a property / the property’s value.  For example, borrowing $80K against a property worth $100K, would be a LTV of 80%.

Net Operating Income (NOI)

NOI = income from a property – operating expenses.

Operating Expenses

Operating expenses are expenses one would incur by owning an investment property excluding mortgage principal & interest payments.  For a more information on operating expenses, click here.

Real Estate Owned (REO)

Real estate owned refers to properties that have foreclosed, due to a borrower being delinquent on mortgage payments, and the bank has taken ownership of the property.

Seller Concession

A seller concession refers to an amount of money a seller brings to the closing of a real estate sale to help pay for the buyer’s closing costs.  

Conclusion

I’ve tried to include some of the more regularly used real estate investment terms here, but this list is by no means exhaustive.  For more real estate terms to brush up on, here’s a good post by Investopedia.

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