Real Estate Investment Terms

Glossary of Real Estate Investment Terms

Real estate investment can be a little confusing so we've taken the liberty of creating this helpful resource to define some important key terms.

Price-to-Rent Ratio

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.

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.

Turnkey Investment Property

A turnkey investment property is a property that is or is extremely close to being move-in ready.

Short Term Rental

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.

Long Term Rental

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.

Equity

Equity is the difference between the current market value and what the homeowner owes on the home. It builds gradually over time.

Appreciation

Appreciation is the increase in a property’s value over time.

Rental Income

Rental income is the money paid by tenant to the landlord.

Seller’s Market

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.

Buyer’s Market

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.

Cash Flow

Cash flow is the money left over at the end of the month, after the landlord pays the mortgage, fees, and other operating expenses. This can be positive or negative.

Debt-To-Income Ratio

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.

Cap Rate

A cap rate, or capitilization rate, measures the annual rate of return on a rental property. It is based on the revenue that the property is expected to generate.

Adjustable Rate Mortgage

An adjustable rate mortgage (ARM), doesnt have a fixed interest rate. The rate is usually set for the first few years, then fluctuates based on the benchmark interest rate.

Fixed-Rate Mortgage

With a fixed-rate mortgage, the interest rate is predefined at the beginning of the loan. Your rate won’t change over time, making planning and budgeting easier.

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.