Most industries have their terminology, and real estate is no different. If you go into real estate, you are investing a significant amount of money, either your own or someone else's. That means you better understand the language if you hope to come out ahead.
The good news is this industry has some standard terms everyone uses, from the novice to the successful investor. Once you know them, you can put that information to use and find your path in the world of real estate. So consider seven terms you need to understand if you aspire to build your fortune in real estate.
1. Fix and Flip Loans
If you are looking to invest by flipping houses, then the first term you need to understand is a fix and flip loan. Fix and flip loans are short-term financing investors use to buy properties, typically ones that need repair and renovation. Once ready, they can resell the real estate for a profit and repay the loan.
These specialty loans provide financing not just for the property but also for the repair work. So they help cover the additional renovation expenses and the costs involved with listing and reselling the home. You can get a fix and flip loan, give the property a makeover and then sell it during a buyer's market when the equity is at its highest.
2. Equity
Equity is a term a lot of people throw around but might not understand. Equity is the net amount between what you owe and what the property is worth at current market value.
For example, if you bought a property for 200,000 dollars and paid 50,000 off, you owe 150,000 dollars. However, if the current market value for that property is 250,000, you have 100,000 dollars in equity.
Equity does not consider the purchase price you paid for the property, only what you still owe. That means it factors in anything that you finance, such as closing costs and other fees. However, it also reduces that amount by what you have already paid.
3. Seller's vs. Buyer's Market
There are two terms people in the industry use to define the current state of the property market. First, a buyer's market means the demand for real estate is lower than the supply. In other words, there are more properties on the market than people looking to buy. So, if you want to sell, you may have to reduce the price of your property to make it more competitive.
The seller's market is the opposite. It means more people are looking to buy than property available on the market. So, sellers can list their property at a higher rate and will likely get a buyer willing to meet that price.
The best time to shop for investment properties is in a seller's market.
4. Rental Income
Not all real estate investment involves flipping houses. Some entrepreneurs get into real estate to make rental income, especially in a seller's market. Rental income is the money you earn from purchasing property and then renting it to others. It can be either residential homes or commercial buildings.
The metric to pay attention to when considering rental income is the total monthly profit. That is the amount you make from the rent after you pay the mortgage, repairs, and taxes. Calculating rental income at the end of a fiscal year allows investors to see if the property is making them money or costing them.
5. Cash Flow
Cash flow is very similar to rental income. It is the net amount you make off a property after paying all its expenses. It is simply the amount coming in versus the amount going out on any real estate asset. If the cash flow is negative, your expense exceeds your income from the property.
6. Appreciation
Appreciation refers to the increased value of a property. The most important thing to remember about appreciation is that it's not guaranteed. Appreciation can vary based on location, economy, taxes in the area, and unforeseen circumstances such as fires or necessary repairs.
It is essential that you remember that investing is a win-lose game. Your property may appreciate one minute and lose value the next.
7. Turnkey Property
A turnkey property is one close to move-in ready. If you are investing in homes, for example, you will likely look for one of two kinds: fixer uppers or turnkey.
If you purchase fixer-uppers, you accept that there will be a period when the property will not make money for you. It needs renovation before you can sell or rent it. You will be putting money into it before it makes any income for you.
A turnkey property is the opposite of a fixer-upper. This real estate will allow you to earn income almost immediately. It does not require any significant repairs, just simple stuff like cleaning or maybe painting.
Real estate investing is complex. It takes time to understand the nuances involved in it. Knowing some basic terminologies is a practical place to start, though.
