Investment property can seem intimidating. With unique terms, acronyms, and lingo, it can seem like this would be an investment option only for people who are experienced in the industry. Only for those who speak the language of investment-property terms.
But it only seems that way.
While risky, real estate investing is not extremely complicated. With these essential terms, you can understand the lingo and make a smart financial decision for your future.
Important Investment-Property Terms
Acquisition Cost
This is simply the total price it will cost to purchase (or “acquire”) the property. It can include a variety of fees, including closing costs, inspections, downpayment, and more. The total acquisition cost will depend largely on the purchase price; the more the home costs, the more you will likely need to pay upfront.
ARV (After Repair Value)
If you are purchasing a fixer-upper investment property, the property will have a value at the time you purchase and a value after repairs and updates have been completed. AVR is simply the value after you purchase the home and make improvements, and it should be weighed against the original purchase price.
CapEx (Capital Expenditures)
This investment-property term refers to the major purchases that are needed to make a property livable or extend the life of a property. Installing a new furnace or replacing the shingles can be considered a capital expenditure; paying to have the carpets cleaned annually is not, as it is not a major expense.
Cap Rate (Capitalization Rate)
This is a calculation, expressed in a percentage, that measures the annual rate of return based on the total cost and profit. Generally this is only used when you buy the home with cash, not a loan.
Example:
Purchase price: $200,000
Profit: $15,000
The math:
15,000 divided by 200,000
Cap rate:
0.075%
Cash Flow
This investment-property terms means the total amount of money you can place into your account at the end of the month once all payments and costs have been paid. If you are spending more than you earn, cash flow is negative, but if you earn more than you have to spend, cash flow is positive. Cash flow can vary by month, so it’s often wise for investors to look at average monthly cash flow.
Fair Housing Act
An important law for property owners, this detailed legislation prohibits owners and real estate professionals from making discriminatory decisions. It prohibits investors, landlords, and management companies from making rental decisions based on race, gender, sexual orientation, family status, religion, or other factors.
Cash-on-Cash Return
This figure is the annual cash flow compared to the total amount invested in the property. This investment-property term basically measures the annual return to the total amount you invested into the property itself.
GRI (Gross Rental Income)
This is a statement of the amount of money collected in rent as well as other income you may be collecting. Additional income can include fees for applications, pets, parking, advance rent, or other expenses paid by current or potential tenants. Security deposits are not part of this calculation.
GRM (Gross Rent Multiplier)
This number tells you how long it will take for an investment to pay for itself based on a variety of factors. Essentially, it is the ratio of the total price of a property compared to its gross rental income.
IRR (Internal Rate of Return)
This term tries to measure an investment property’s long-term profitability. It considers annual cash flow and changes in equity over the lifetime of your investment. It helps investors determine when a property becomes truly profitable.
NOI (Net Operating Income)
A property’s potential for profit is known as the NOI. It should not include mortgage payments, but will instead include repairs, maintenance, property taxes, HOA fees, and any other costs associated with your property.
ROI (Return on Investment)
A measurement of how much money is made on an investment compared to the cost of the investment. If you have a mortgage on your property, this will need to be factored into the calculation. Repairs and maintenance will impact your ROI as well. This is also a good comparison point for property vs other investments.
RTO (Rent to Own)
A contract agreement that combines a real-estate lease with a purchase agreement. They are usually structured in a manner that lets a tenant pay rent while gradually making a payment towards the purchase. For example, a tenant may pay $1800 monthly; $1,400 could be rental payments, while $400 will be credited towards the purchase of the house.
Rehabilitation (AKA Rehab Property or Fixer-Upper)
A property that needs significant repairs and remodeling (or “rehabilitation”) before it can be placed on the rental market. Improvements can include minor work to make the home more attractive, or significant repairs to make the home legally habitable.
Remote Investing
Buying real estate property that is not located in the same geographical region as your residence. Essentially, if you are buying a property that would require more than an hour or two to reach, you are investing remotely. People may invest remotely for a variety of reasons, including taking advantage of lucrative markets.
Short-Term Rental
A type of property that is rented out for a short time, usually on a weekly or monthly basis. Often rented to vacationers, this is the type of property found on sites like VRBO and AirBNB.
1031 (or 1031 Exchange)
A tax code that allows investors to sell a property, reinvest the income, and avoid capital-gains taxes. This gives you a lot of flexibility if you want to get rid of a property but do not want to pocket the income and instead would prefer to purchase a different property. Of all the investment-property terms, this can be one of the most useful.
Turnkey Property
An investment property that is ready, or close to ready, for tenants immediately after purchase. A turnkey property does not need repairs, remodeling, or significant cleaning; just “turn the key” and make a profit. These are especially beneficial for buyers who are new to property investments, and they can bring income almost immediately.
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Investment property can seem complex. It can also be incredibly rewarding. If you want to learn about affordable mortgage loans that can help you build a strong portfolio, contact our staff today!
