April 20th, 2024
Real estate investing is not a passing fancy. Everyone wants to do it, but not everyone knows how to do it effectively. Some try to engage real estate agents to help them in seeking good residential properties or hire consultants to advise them on commercial properties. However, you should be aware of commonly used real estate terms.
Whatever property or asset type you plan to invest in, it is better to know these terms that are in common use in the real estate industry. This will help you prudently make real estate investments in the housing market.
Return on investment (ROI) is the most common term used in property parlance. Return on investment refers to the profit you get on your initial investment over a certain period of time. It is calculated by dividing the net profit by the capital cost.
A high ROI or rate of return is what individual investors seek to get better profits. This ROI calculation is a crucial factor that helps you decide whether the property is worth investing in or not.
Any income-producing property like land, factory, office building, apartment complexes, gas station, etc. is termed as CRE or commercial real estate. This type of real estate property is difficult to sell as it is often owned by many commercial real estate investors jointly. The risks are higher during recessions and can be impacted by government policy.
The basic sale price is the base rate per square foot that the developer or seller quotes for the property. It does not include amenities charges, maintenance charges, location fees, etc. Usually, such extra charges are quoted as a percentage of the basic selling price.
The Fair Market Value (FMV) of a property is its reasonable sales price in the open market that buyers usually quote. It gives the actual real-time valuation of the property at a particular point in time. FMV helps buyers to gauge if they are paying the right purchase price for their property.
Cash flow will give you an estimate of how much you can earn from your property after deducting the operating expenses. Simply put, it is the income from your property minus its expenses. If you have to spend more on your property than what you earn from it, you will have a negative cash flow.
Most investors look for only properties with positive cash flow or consistent cash flow. Again this can be compared with income from mutual funds.
Appreciation refers to the increase in value of a property over some time. Commercial property managers and owners will see a definite appreciation in their property value if they buy or build it in an upcoming or busy area.
PITI is nothing but Principal, Interest, Taxes, and Insurance. Most of the residential mortgages get paid monthly as PITI. This acronym for a monthly mortgage payment is crucial as it affects your cash flow.
Closing costs refer to the fees that you pay when you close a real estate transaction. These costs could be in the form of inspection fees, estate transfer fees, loan origination fees, etc.
Closing fees and processing fees usually amount to 2 - 5% of the purchase price of the property. Both residential and commercial property owners must plan their budget keeping a certain amount aside for the closing costs.
Gross Rental Income is the amount collected as base rent plus any additional charges levied as parking charges, pet charges, etc. Security deposits are not taken into account under GRI.
GRI helps a real estate investor predict how much income his property might generate. Investors start with the GRI while making the property proforma. They then make the deductions from this GRI to know the exact income from the property. This will help them in planning their monthly payments towards the mortgage loans.
A fixed-rate mortgage is a type of loan where the rate of interest is fixed throughout the term of the loan. The other option is the adjustable-rate mortgage where the interest rate fluctuates during the tenure of the loan.
A Riparian owner is a person who owns a land bordering/abetting/enclosing a water body. Usually, the state owns the rights to surface water in lakes and rivers. Riparian rights like water usage, boating, fishing, bathing rights, etc. come into play for properties bordering such water bodies.
A credit score reveals the eligibility of a person to qualify for a loan. It is a measure of his loan repayment history and account balances among many other factors. While issuing a loan on a real estate property, banks and lending institutions consider the individual's credit score primarily. This score is calculated based on payment history, amounts owed, new credit, length of credit history, and credit mix. The financial institution may decide not to give a conventional loan due to the potential risk of the loan payments not being repaid, from time to time.
Business owners might entrust the right and responsibility of managing a property to a real estate agent or a control person. This controlling person can lease, rent, supervise, and collect dues from the tenant on behalf of the owner.
Every person interested in real estate investing must have a good knowledge of the above real estate terms to make his or her investment a success. There are other words, such as capitalization rate, which is calculated by dividing a property's net operating income by the current market value.
You can always contact a friendly real estate agent like Billy Sutton or Lacey Sutton, from Coldwell Banker Chesapeake to seek advice on investment properties on the Eastern Shore of Maryland to invest in. We are well-versed in the Chesapeake real estate market and have a strong understanding of real estate definitions. Get in touch with us if you need help with your real estate investment strategy.
Whether you’re selling or buying a home for the first time or the tenth time, we’re here to help the process go as smoothly and quickly as possible. Just let us know your Chestertown real estate goals and we’ll make them happen.
We’d be happy to discuss your estate for sale and answer any questions you may have about buying or selling homes in Maryland. Drop us a line or fill out the contact form today – we look forward to getting to know you!
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