Every industry has its own terminologies, and real estate is not an exception. There are those lingos and acronyms that are only used in real estate and have a particular meaning. Thus, you are sure to encounter real estate terminologies that you have never heard before, whether you are a first-time investor or are an existing investor. Here is our list of real estate terminologies that every investor must know. Please check them out, as knowing them will make you successful in this luxurious industry.
1. Cap Rate
While it is popularly known as a cap rate, some investors prefer it as a capitalization rate. When you hear anyone talk of the cap rate, you definitely know that they are talking about the return on the investment or the investment value. Investors calculate the cap rate by dividing the current value of the investment by the net operating income. Therefore, it is usually expressed in percentage. What is the best cap rate of the property? A property or investment is of best value if its cap rate is between four and ten percent of the property.
2. Rental Arbitrage
Rental arbitrage is sometimes referred to as short-term rental. Investors who practice rental arbitrage rent a particular property on a long-term basis and then re-rent it as a whole on a short-term basis or subdivide it into parts before sub-renting it on a short-term basis.
Airbnb is one of the companies that are known to engage in this form of real estate investment. The good thing with the rental arbitrage is that it does not require huge investment but still leads to high cash flow. Also, there are minimal risks involved in this business model as it is acceptable both morally and legally. If you want an easy way of joining the real estate industry, you better start thinking about rental arbitrage.
3. Property Equity
If you have been in the finance field, you must have heard about the term equity. Well, in real estate, the term means the ownership percentage that the homeowner or the investor has in a property in relation to its current market value. For example, assuming that you pay the whole amount of the property, you have one hundred percent equity since you entirely own the property. However, some investors use a mortgage to purchase a property, and this means that they own only a percentage of property equity while the lender owns the remaining. Your equity keeps on increasing as you pay out the loan, and you will own one hundred percent equity of the property once you clear your loan.
4. Net Operating Income
The property’s net operating income shows whether the property has the potential of making a profit. Therefore, it is the parameter that is used to measure the profitability of the real estate investment. To get the property’s net operating income, you need to revenue derived from the property and subtract all the expenses such as operating expenses. These expenses include the cost of repair, property taxes, and scheduled maintenance. However, you are not supposed to include mortgage payments in net operating income.
Have you ever heard that investors borrow capital which they use to maximize the returns for their own benefits? This is what is known as leverage in real estate. The investors approach lenders and use a mortgage to purchase the property. Even though doing this does not give you full ownership of the property, you still derive some utility from the property. Thus, you benefit from the said property even though you have not paid for it in full. You can use the profit you get from this property in securing other investments. Have you ever heard of working using other people’s money? This is what it means!
Did you know that most real estate properties increase in value over time? This is what is known as appreciation. Several factors affect the rate at which your property appreciates. Some of these factors include inflation, market forces such as demand and supply, and neighborhood area desirability. Also, investors improve and upgrade the property for it to fetch a high value. All investors rely on property appreciation to make profits.
As you become more involved in real estate investment, these are some of the terms that you will come across. There are more terminologies to learn, but you can start real estate investment like a pro once you are familiar with them.