January 10, 2024
Like any industry, the real estate industry has many terms. As a new buyer, you must know all the key terms of real estate as it involves a large sum of money and long-term commitments. Knowing the terms helps in effective communication, risk reduction, and informed decision-making.
So, the real estate terms you must know before investing include:
Each of these terms has its own definition and uses. Some of these terms relate to the investment, ownership, and income from the property. Keep on reading for a detailed discussion on the real estate investment terms.
There are many terms that the investor must know before investing in real estate. For your convenience, we’ve divided the list of real estate terms for buyers into two parts: General terms and Investment-related terms.
Knowing these terms is necessary to understand the buying process and the overall cost of the property.
In real estate terms, the acquisition cost is the overall cost of the property. This cost contains all expenses, such as –
The included expenses in the acquisition cost may vary according to your property condition and location.
This real estate term refers to the official estimate of the market value of the property provided by a professional appraiser. The purpose of assessment is to –
In this case, you should look for a reliable and professional appraisal to ensure fair market value for the property you want to purchase.
With the capitalization rate, you can determine the possible ROI of the property. It also indicates the estimated risk of investment and a helpful method to pick the fruitful property for investment among many.
The formula for calculating the capitalization rate is given below:
Capitalization Rate = Annual Net Operating Income/Property’s Value
This term in real estate investing determines the income from the property after deducting all operating expenses, including debt. Cash flow can turn into both a negative and a positive flow based on the amount of your expenses and earnings.
If you can earn more than you spend, it is positive cash flow. And when expenses go beyond your earnings, it is negative cash flow.
This refers to getting an early loan amount approval from the lender before a property search. The lender reviews the investor’s finances to set the maximum budget.
It prepares them for offers and ensures that financing can be arranged to find the right property
The definition of closing cost refers to the additional fees related to the property purchasing. These fees include:
Remember, this property investment term can cost you around 5% of the overall property value.
This is the cash that you need to pay during the property-buying process. Generally, the typical down payment percentage is 20% for real estate properties. This term offers some benefits to you, for example:
If you buy a property with a down payment, you only own the portion of the property you paid for. And that’s what equity means when it comes to real estate investing.
For example, suppose you buy a property for $300,000 with a 20% down payment, so the mortgage is $240,000. Your initial equity would be-
Equity = Property Value – Mortgage Balance
= $300,000 – $240,000
Over time, your equity will increase as you pay your monthly mortgage.
These terms provide details on investment strategies and property ownership. Understanding these terms will give you an idea of the investment outcome.
When you pick a residential property to invest in, understanding carpet, build-up, and super built-up area terms is crucial.
This term measures the annual percentage return of actual cash invested, including down payment and closing costs. The formula of CoC return measurement is –
CoC Return = (Annual Operating Income / Total Cash Invested) * 100%
In real estate, ROI refers to the annual return amount (total profit or loss) from a property compared to its total cost. It is calculated by taking the annual net income and dividing it by the total property purchase price. The formula is –
ROI = (Gain from Investment – Cost of Investment) / Cost of Investment * 100%
This real estate term is a benefit for the investor. Leverage is the use of a mortgage that helps the investor to increase potential ROI and boost equity.
This commercial real estate term means the gross income of a property investment, including financing costs and excluding all operating expenses.
If you want to invest in a commercial property, you will need a professional that owns, finances, and manages income-producing assets for you. Generally, REIT organizations invite investors to buy commercial properties.
It is a type of ownership where there are two or more owners owning equally shared property. Each owner can invest in his own shares and make profits. Also, an owner can sell the shares he owns without the permission of another owner.
So, you now know the real estate terms you must know before investing. Remember that these are only the key terms of real estate investment. Depending on the type of investment, you may need to know other terms that should be described to you before purchasing.
Additionally, you should always go through all the terms thoroughly and have a professional with you before signing any lease.
GLG Assets LTD is a reliable professional property developer in Dhaka. With our proven expertise, commitment to quality, and client satisfaction, we can help you achieve your dream home and investment goals.