No matter the field you’ll find yourself in, you’ll be faced with industry jargon and the real estate industry is no exception.
You may ask yourself why it’s necessary to understand real estate investment terms when you’re not planning to become a broker. But the answer is that this understanding makes communicating easier with other real estate professionals.
At first, it might be hard to understand or remember real estate terms. But as you get immersed in the industry, you’ll find it easier to use. It makes conversations quicker and enables you to understand the latest news in the real estate market.
Here are some common real estate terms that professionals like ourselves at MN Property Nerds, use on a daily basis:
The rental property provides passive income to its owner. A renter pays out a fixed sum each month for occupying the rental property and it can be categorized as either residential or commercial real estate.
Short-term rentals are properties rented for a short duration. Vacation homes typically fall under this category and these properties are often furnished and ready for move-in.
Long-term rentals are properties rented for a longer duration. They’re often called traditional rentals since they provide a steadier income source for investors.
Property owners receive a rental value every month for letting renters occupy their property. The money paid to them is referred to as rental income.
After rental owners pay off their expenses, the leftover money is termed cash flow. If the expenses outweigh income, it’s known as a negative cash flow. If you have collected more rent after the expenses are paid off, this is known as a positive cash flow.
An appraisal is conducted when lenders want to measure a property’s market value. This is to ensure that the loan amount they’ll be providing is aligned with the value of the real estate. Appraisals are done by authorized professionals to assess the property’s value accurately.
Closing is considered the last stage of a property transaction. This is the official period when the property ownership is transferred, and payments have been completed.
Closing costs are processing fees and need to be paid up to finalize the real estate transaction. This includes the charges of the lender, attorney, insurance company, real estate agent and if applicable, the homeowner’s association.
Having a fixed-rate mortgage means that the borrower has a uniform interest rate to pay for the entire duration of the loan. This is advantageous for the borrower since the interest is more predictable.
Foreclosure is a legal procedure wherein the lender can take back the real estate when a borrower is unable to pay the mortgage payments as agreed upon. Generally, a notice is sent to the borrower when the loan is 90 days past due. The foreclosure allows the lender to gain control of the real estate and put it up for sale.
A homeowner’s association (HOA) is a private organization created by planned communities, subdivisions, or condominiums. Their purpose is to develop and enforce rules for the residents and the properties.
Membership is often automatic when you purchase a property with an existing HOA. As a member, you’re expected to pay HOA fees.
A home inspection is a report of the condition of a home performed by a qualified inspector to evaluate the property in terms of its plumbing, heating and cooling systems, and electrical work, including fire and safety issues.
It also covers searching for pest infestation and other issues that have an effect on the value of the property. This doesn’t take the place of inspections but can be used to help with tenant damages.
Real estate agents carry a license and professionally represent buyers and sellers during property transactions. They often work for a real estate broker.
Realtors are licensed and represent the buyers and sellers during real estate transactions. They are members of the National Association of Realtors. So, they’re governed by the code of ethics of NAR and must conduct their work in compliance with it.
Real estate brokers can professionally represent the buyers and sellers of real estate. They can act independently and hire real estate agents to work for them. Given their training, they’re able to manage complex real estate transactions.
A buyer’s market is where more properties are put up for sale compared to the number of buyers. This is advantageous for the buyers since they can negotiate with the property sellers for property price discounts.
A seller’s market is a condition wherein the property demand is high and there are more buyers than available properties for sale. This is advantageous for the sellers since they can assign higher property prices knowing that there are more interested buyers.
Appreciation is the rise in a real estate property value in a given period.
A pre-approval letter is a document typically handed out by a lender like a bank. It will inform the potential borrowers of the loan amount that the lender is open to giving them. This can be reassuring to property sellers as they know the buyer has access to a loan if it’s needed.
A 1031 exchange is a like-kind exchange of two properties that you would avoid paying any capital gains tax on.
Above are some of the common real estate investing terms you’ll encounter when you join the industry. You’ll learn more terms as you participate more in the field. Learning the meaning behind these terms helps you solidify your real estate knowledge.
If you have any further questions, please don’t hesitate to contact our expert property management at MN Property Nerds!