Just like any other industry, real estate has its own jargon used by various participants in the industry. You might have come across several real estate terms, some of which you were able to comprehend and maybe others that you couldn’t.
If you’re new to real estate investments, some of these terms may seem intimidating to you. It may take you a long time to know all terms, understand them, and know their significance in relation to rental property.
Knowledge of these terms will help you communicate much better with other real estate professionals. And who better to pass on this knowledge to you than the leading property professionals in the industry?
The team at Innovative Property Solutions, an experienced and reputable real estate service company based in Jacksonville, provides the basic real estate terms that each real estate investor should know.
Undoubtedly, you’ve come across this term several times even outside of the real estate industry. Rental property refers to the home where the person occupying it makes periodic payments to the owner for occupying the space. This tends to be monthly, quarterly, or yearly.
There are two different types of rental properties: residential property and commercial property. Residential property consists of the rented being used for accommodation/housing purposes. Commercial property, on the other hand, is rented for the purpose of carrying out business activities.
This refers to a rental home or unit that’s already furnished and rented out for a short period of time.
A common example is an Airbnb property. Short-term rentals are often used by individuals who do not intend on being at a place for a prolonged period of time. This amount of time is often less than a month.
This is the more orthodox form of renting where rental properties are let out for a long period of time. They are also referred to as traditional rentals. However, short-term rentals have gained popularity over the years due to their convenience. Before choosing which form of renting is ideal for your property, it’s recommended that you perform a thorough analysis of the neighborhood, demographics, and economic activities.
This is the amount of money that is paid periodically to the owner for the occupation of a rental unit. The rental amount is explicitly specified in the rental agreement.
Equity refers to the difference between the amount the property owner owes on a mortgage and the present market value of a property. Equity gradually builds up over time as the mortgage amount reduces on payment. The property value also appreciates over time as the mortgage amount is reduced or cleared.
This refers to any amount of money that is transacted in regard to the property. However, in most cases, cash flow is often used to refer to the remaining amount of money the property owner retains after clearing all operational costs.
Cash flow can either be positive or negative which indicates either a profit or loss from the investment.
If the property expenses are less than the amount it earns, then that results in a positive cash flow/a profit. If a property’s expenses are more than the total amount collected from the property, then it results in a negative cash flow.
This refers to the increase in value of a real estate property over time. Appreciation occurs as a result of various factors, such as an increase in demand and inflation, among others.
The net operating income refers to the amount of money a property is able to make annually after deducting the expenses. Property expenses include elements like property tax, property utilities, maintenance costs, and management fees.
This term is often used by lenders when trying to determine the ability of an individual to pay a given amount. The debt to income ratio compares the monthly debt payment of an individual to their gross income.
This is the ratio used on the net operating income for an investment property compared to its capital cost. It’s used to determine the profitability of real estate property.
As the name implies, this is the worth of your property calculated from the cash flow accruable to the property over a certain period of time. The cash flows will be discounted by the use of a market rate derived from similar investment opportunities in the local market.
This is the discount rate at which the net present value is having all cash flows from the property equate to zero. The internal rate of return is used to estimate the profitability of a potential investment.
This is a property that has been sold or is in the process of being sold without being advertised or any public knowledge.
To summarize, such properties are not listed for sale.
This is the ratio of the total annual cash flow before tax is imposed. It allows investors to analyze the cash flows from their income-generating assets.
This is a letter that is offered by a bank before processing your mortgage. The pre-approval letter is required in order to determine the ability of an individual to make a mortgage payment. It assures home sellers that an individual can be granted a loan of a given amount.
This is a real estate market where the demand from property buyers exceeds the supply of property in the same market. In such a case, property prices tend to be higher and more attractive to sellers.
This is a real estate market where the demand for rental property is lower than the supply of properties in the same market. In such a case, the property prices are often low making it ideal for property buyers.
A credit score is a financial term that you are also likely to encounter when looking for a mortgage. It refers to numerical expressions that determine the financial worthiness of an individual depending on their credit files analysis. Lenders use it to determine if an individual qualifies for a loan.
As you enter the property industry, you should be aware that you are entering a very specific market. To help navigate it, call on the property professionals at Innovative Property Solutions! Our full-service property management company is dedicated to helping you reach your financial goals.