In every field, there are certain terms that industry professionals are use regularly. But unfortunately, when you’re new in the real estate industry, you may feel out of place when these terms are used.
That’s why we here at Pro X Property Management have compiled a list of the common terms used in the real estate industry. Let’s take a look at some of them:
1. Rental Property
A rental property refers to a real estate investment where a landlord leases out their property to a tenant in exchange for rent over a specific period. The term may be used to refer to a commercial or residential property.
2. Rental Income
Rental income refers to the value earned from investing in a rental property. This is set by the landlord and paid to the landlord by the tenant for the right to utilize their property. The funds are paid for a specific time period according to the conditions of the lease.
3. Cash Flow
This refers to the amount of income that an investor gets to keep after deducting the operating expenses. The cash flow of an investment can be either positive or negative. Positive cash flow occurs when the income outweighs the expenses. Negative cash flow occurs when the expenses exceed the monthly income.
4. Equity
This is a common term in real estate that describes the portion of a property owner’s contribution to a financed purchase. It is the difference between the current market value of a property and the amount of debt financing. Equity in a property increases as the debt gets paid or when the property appreciates in value.
5. Cap Rate
The capitalization rate, or cap rate, refers to the ratio between the annual rental income of an investment property and the current market value. This ratio is used by investors to compare the returns of various real estate properties. Cap rate is a good indicator of a rental property’s financial performance.
6. Net Operating Income
The Net Operating Income (NOI) is the annual income earned from a rental property minus the operating expenses for that year. It is a before-tax figure that excludes payments on loans or amortization. This metric is used by investors to analyze the profitability of a real estate property.
7. Cash on Cash Return
A property’s cash on cash return is a ratio of the annual income earned to the cash invested. This metric can be found by dividing the annual income of a property by the mortgage paid in that particular year.
The figure is expressed as a percentage and real estate investors use it to compare the income earning potential of various rental properties.
8. Internal Rate of Return
The Internal Rate of Return (IRR) is a metric used by investors to measure the profitability of an investment property. It is the rate at which the Net Present Value (NPV) of all future cash flows from the property equals zero. The higher the internal rate of return, the more attractive a property is to an investor.
9. Debt-to-Income Ratio
This is a metric that compares the monthly debt payment received to the gross monthly income. It is used to indicate the percentage of debt that is covered by your monthly income. Banks and lending institutions use this ratio to assess the risk before offering a loan.
A lower debt-to-income ratio is preferred because it shows you’re in a better position to service your loans.
10. Seller’s Market
A seller’s market is a situation where there are more buyers than sellers in the real estate market. As a result of the high demand, real estate prices increase giving sellers a more attractive return on their investments.
11. Buyer’s Market
A buyer’s market favors real estate buyers. In this scenario, there are more properties for sale than buyers in the market. The low demand means property buyers can make a purchase at relatively low prices.
12. Appreciation
Appreciation in real estate refers to the increase in its value over time. Property appreciation can be attributed to many different factors such as inflation and changes in the market. But demand for property is considered to be the strongest factor.
13. Off-Market Property
An off-market property, or pocket listing, refers to real estate that is placed for sale without advertising. These properties are not listed on multiple listing services. So, property sellers need to go the extra mile to find buyers on their own.
14. Pre-Approval Letter
A pre-approval letter refers to the first-time evaluation of a potential borrower by a lender. It is provided by the lender before one begins the loan application process. A pre-approval letter provides assurance to the seller that a buyer can get debt financing should the need arise.
15. Hard Money Loan
This refers to a loan provided by private investors or organizations based on the value of an asset. Hard money loans typically have a higher interest rate than conventional loans but they are funded in a shorter period of time.
16. Predictive Analytics
This process involves the study of historical patterns in an effort to predict future trends in the market. In real estate investment, predictive analytics can provide insight into the potential performance of a property.
Bottom Line
These are some of the common terms you may come across in your real estate investment journey. Although first-time investors might feel intimidated by the jargon, understanding these terms will put you in a better position to make sound investment decisions.
At Pro X Property Management, we have a wealth of experience in managing a diverse range of rental properties. Our goal is to help you maximize the return on your investment by providing excellent property management services like marketing, screening and financial reporting. Reach out to us today for more information on our property management services.
