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Each industry has its own set of terms and acronyms, and the real estate industry is no exception. While seasoned real estate investors view these terms as their daily vocabulary, it can be intimidating to someone who is new to the field. Before getting into real estate investing in Memphis, here are a few terms you should get familiar with:
A mortgage where the rate varies over the course of the loan based on an interest rate that fluctuates due to market conditions.
The appraised value is the evaluation of a property’s value. During the mortgage origination process, a professional appraiser is typically hired by the borrower to determine if the offer price is equal to or less than the actual value amount.
Cash flow is an extremely important term in real estate investing and refers to the amount of money that an investor pockets at the end of each month. It is calculated by subtracted the operating expenses from the tenant’s rent payment. Cash flow can be either positive or negative, depending on if your expenses are higher than your profit.
Closing costs are typically paid for by the borrower upon purchase of a property in addition to the down payment. Costs include mortgage insurance premium, homeowners insurance, points, property taxes, etc. Closing costs are typically between 3 and 4 percent of the loan amount. In buyer’s markets, you may be able to have the seller pay the closing costs on a residential property, but this is uncommon in the recent market.
Earnest money is typically between $500 and $2,000 and is submitted as good faith that the buyer intends to follow through with the sale of a home. A broker will hold the money in an escrow account until closing. If the sale falls through due to reasons caused by the buyer, they have the potential to lose their money.
Equity refers to the difference between your property’s present market value and the amount owed on the mortgage. Over time, the value of equity builds up gradually as the mortgage balance reduces and the market value appreciates.
This type of mortgage has a set or fixed-rate, meaning your mortgage payment will remain the same throughout your loan term. Knowing what your payments will be can help you accurately predict returns on investment.
An inspection report is a written record of the property’s current condition - foundation, roof, interior and exterior, HVAC, appliances, etc. Inspections are an important step in a buyer's due diligence, as a failed inspection may change a buyer’s mind and/or the property’s value.
Inspection contingency can be included in the purchase agreement and grants the buyer the opportunity to conduct an inspection of the home, receive an inspection report, and then either negotiate costs with the seller or terminate the purchase agreement based on the content on the report.
Single-family homes are free-standing homes used as investment property. These properties are typically lived in by a couple or single family.
Multi-families homes are real estate properties with more than one available unit. This can include apartment complexes, condos, duplexes, and triplexes.
A pre-approval is necessary to put an offer on a property. This letter is certified from a bank and tells the sellers that you can be granted a loan if needed. A pre-approval letter also determines how much you can afford to borrow.
Property taxes are based on the value of the home and are paid monthly by the owners, many times as part of the mortgage payment.
A purchase agreement is a legal contract in the real estate industry between the buyer and seller where terms and conditions are outlined and agreed upon before closing. This document should include the property address, a clear description of the property, and the legal identities of both the buyer and seller.
This is one of the most common real estate investing terms. A rental property is a type of property that is owned by one entity and occupied by another. The owner receives a monthly payment, or rent, from the occupants for use of the property. Rental properties can either be residential or commercial.
Our team at Memphis Cashflow works to provide investors with ideal locations for rental properties and help you understand all the ins and outs of investing. If you are interested in property investment in the Memphis or Little Rock areas, contact us today for more information.