Essential Real Estate Terms You Must Know Before Investing

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:

• Acquisition cost
• Capitalization rate
• Cash flow
• Closing costs
• Down payment
• Equity
• Return on investment
• Net operating income
• Tenant in common, and so on.

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.

Real Estate Terms You Must Know Before Investing

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.

General Real Estate Terms —

Knowing these terms is necessary to understand the buying process and the overall cost of the property.

• Acquisition Cost

In real estate terms, the acquisition cost is the overall cost of the property. This cost contains all expenses, such as –

• The property price.
• Closing costs
• Inspection fees
• Moving expenses
• Prepaid cost

The included expenses in the acquisition cost may vary according to your property condition and location.

• Appraisal

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 –

• Determine the loan amount at the time of property purchase.
• Create a competitive asking price for the buyer.
• Determination of property tax.
• Use an appraisal as legal evidence in court for property-related cases.

In this case, you should look for a reliable and professional appraisal to ensure fair market value for the property you want to purchase.

• Capitalization Rate

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

• Cash Flow

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.

• Pre-approval

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

• Closing Costs

The definition of closing cost refers to the additional fees related to the property purchasing. These fees include:

• Attorney fees
• Loan origination fees
• Credit report fees
• Recording fees
• Underwriting fees
• Appraisal fees
• Title searching and insurance fees
• Escrow fees

Remember, this property investment term can cost you around 5% of the overall property value.

• Down Payment

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:

• Decrease your monthly mortgage payments
• Positively influence equity
• Lead to better interest rates with a strong loan application.

• Equity

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

 = $60,000

Over time, your equity will increase as you pay your monthly mortgage.

Investment-Based Real Estate Terms

These terms provide details on investment strategies and property ownership. Understanding these terms will give you an idea of ​​the investment outcome.

• Carpet VS Built-Up VS Super Built-Up Area

When you pick a residential property to invest in, understanding carpet, build-up, and super built-up area terms is crucial. 

• Generally, the carpet is the property’s usable floor area only. Around 70% of the property is called carpet area.
• The built-up area is the carpet area, including terraces and walls. It includes around 80 to 85% of the property.
• Again, the super built-up area is the entire property, including all the common areas.

• Cash on Cash (CoC) Return

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%

• Return on Investment (ROI)

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%

• Leverage

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.

• Net Operating Income (NOI)

This commercial real estate term means the gross income of a property investment, including financing costs and excluding all operating expenses.

• Real Estate Investment Trust (REIT)

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.

• Tenant in Common

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.

Conclusion

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.