Glossary of Real Estate Investment Terms
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:
- Adjustable-rate mortgage
- Appraised value
- Buyer's market
- Cap rate
- Cash flow
- Closing costs
- Debt-to-income ratio
- Earnest money
- Fixed-rate mortgage
- Inspection report
- Inspection contingency
- Long-term rental
- Multi-family homes
- One percent rule
- Pre-approval letter
- Price-to-rent ratio
- Private mortgage insurance
- Property taxes
- Purchase agreement
- Rental income
- Rental property
- Seller's market
- Short-term rental
- Single-family homes
- Turnkey investment property
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.
Appreciation is the increase in a property’s value over time.
A buyer’s market is when there are more homes for sale than there are ready buyers. You are more likely to get a great home at a lower price in a buyer’s market, as there are an abundance of available houses. It can take longer to sell your home in a buyer’s market if you decide to sell during this time.
A cap rate, or capitalization rate, measures the annual rate of return on a rental property. It is based on the revenue that the property is expected to generate.
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.
Your debt-to-income ratio is looked at when you apply for a loan to see how much you pay towards debt every month compared to how much you earn.
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.
Long-term rentals are typically rented to tenants for long periods of time. They are usually unfurnished, and the tenants are charged a monthly rent.
Multi-families homes are real estate properties with more than one available unit. This can include apartment complexes, condos, duplexes, and triplexes.
One Percent Rule
The one percent rule is frequently referred to by real estate investors. It says that the monthly rent of an investment property should be at least the same or greater than the home’s total purchase price.
A pre-approval is necessary to put an offer on a property. This letter is certified by 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.
Price-to-rent ratio is used to determine if it is cheaper to own or rent a house. It is a ratio of annualized rent compared to home prices in a specific area.
Private Mortgage Insurance
Private mortgage insurance, or PMI, is required when you make a down payment on a home of less than 20%. It is usually a percentage of the mortgage loan, added to your monthly mortgage payment. It can usually be removed once the homeowner reaches at least 20% equity.
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.
Rental income is the money paid by the tenant to the landlord.
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.
In a seller’s market, demand exceeds supply. This simply means that there are more buyers than there are homes available. This is a great time to sell your house, however, it is more challenging for a buyer to get an offer accepted. Seller’s markets typically result in bidding wars and increased home prices.
Short-term rentals are usually furnished for people to rent out short-term for a vacation. This can be a single-family home, apartment, condo, etc.
Single-family homes are free-standing homes used as investment property. These properties are typically lived in by a couple or single family.
Turnkey Investment Property
A turnkey investment property is a property that is or is extremely close to being move-in ready.
Let Memphis Cash Flow Help You Find the Right Investment Property
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.