Important Terms to Know Before Investing in Real Estate

Real estate investing is not a new concept. However, it is one of the most dynamic industries globally. Innovation is also taking root in the industry, creating a flurry of new vocabulary that any investor should know. 

Here are some of the most relevant terms that every investor should know.

Net yield

The term is my favorite term when it comes to profit investing. If you are investing, you are interested in making money. Net return is the balance you get after paying all expenses. If you own a rental property, you have to deduct all the expenses, including taxes and costs related to vacancies, to arrive at the net yield.

Flipping 

You are likely to hear it being used by many short-term investors. It means buying a distressed property, renovating it, and selling it at a profit. You may also want to know about the after value repair. If you want to finance your investment, you may also want to know about the loan-to-value ratio. Lenders prefer a healthy ratio of the loan requested to that of the value of the property.

Buyers and sellers’ market

The terms are better understood together. A buyers’ market means that buyers are at an advantage in the market. It happens when there are more sellers in the property market than there are buyers. Such a market attracts many motivated sellers—they will make concessions to make the deal go through. When the sellers are fewer, it means that demand outweighs supply. Typically, the sellers will have the upper hand. If you want to buy an investment property, targeting the buyers’ market can be more profitable than buying during a sellers’ market. 

Closing and closing costs

Once you have an agreement about buying or selling a property, you have to finalize the transaction. The meeting to complete the transaction includes closing costs. Such costs include taxes and insurance. You have to worry about earnest money before you place it. You could lose it if you are not able to push through the deal. 

Turnkey investment

Turnkey means a property that is ready for tenancy or occupation. It means that the keys to the property are ready to change hands. You need to fully understand and learn how turnkey works before you start your investment journey. A typical turnkey investment includes a remodeled property. The owner ensures that the property is ready to make you money before selling it. It’s the perfect investment strategy for those who are new to investing and for those who would like to earn a passive income without too much work involved. 

Tax deferral of capital gains in a real estate 

If you have made a property sale that makes you a profit, you can defer paying tax through the 1031 exchange. You can use the deferred tax amount to invest in your next project without declaring a profit as long as you invest in a similar property. You don’t have to submit capital gains from the sale of such property. 

Appraisal 

Every property will need an appraiser to determine its value. Buyers will insist on a qualified appraisal report. It can also help sellers set the correct asking price. A professional appraisal is inevitable for insured and lender-financed properties. Appraisers factor in the strengths and weaknesses of any particular property.  

Tenancy

It can mean many things, depending on whom you are asking. To a lawyer, it means the period, contract, and terms that a property owner and a tenant have. It is also the relationship between those two people. Nowadays, screening precedes tenancy. You have to pre-qualify tenants to maximize returns. You can also exercise tenancy terms through a property manager. Indeed, you must also be aware of the guiding principles of tenancy enshrined in the Fair Housing Act. Discriminating clients can land you into trouble.

Refinance

In case you feel that there is a cheaper loan out there, you can form a new partnership with a new lender with the hope of buying the current loan from a lender and replacing it with a cheaper alternative. It is a form of management of your property loans to improve your overall financial position. A good example can include exchanging hard money loans with a mortgage. 

Down payment

It is the money you put aside to facilitate a property transaction. If you are financing the property transaction, you will need to come up with a down payment. The recommended proportion is 20% of the property. You may not place all of it. You need some money during closing. 

You should know and understand these terms if you want to invest fruitfully in real estate. Arming yourself with all the right tools and know-hows could be the difference in making the right investments or not. Avoid potential slippery slopes, such as committing earnest money when unsure of the availability of your funds. 

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