Eleven Must-Know Terms for Real Estate Investors
When you take up a new hobby, whether it’s gaming or golf, it’s important to know the lingo of the thing you’re trying to play. The same goes doubly when you’re entering into a new investment arena. For property investors, the stakes are much higher, since ignorance of commonly used terms can affect your bottom line. With that in mind, we present a curated list of the property investment terms you must know to maintain success in the business.
Appreciation – calculation of the increase in a rental property’s valuation over a period of time. Improvements, inflation, increased demand, or reduced supply can cause appreciation.
Cash Flow – the amount of money rental property investors can pocket at the end of each month as a profit after mortgage and all operating expenses are paid. Positive cash flow means you’ve earned more than you spent, while negative cash flow means you’ve spent more than you earned. Cash on Cash Return – a ratio of a rental property owner’s annual cash flow to the total cash invested in the property, calculated as a percentage.
Capital Expenditures – typically large, one-time purchases or investments towards improvements to add value to a rental property or extend its life as a rental. Capital expenditures are typically paid with capital reserves. Capitalization Rate – an essential calculation for comparing investment properties according to the rate of return expected from the property, capitalization rate – or cap rate – is calculated by dividing your annual net operating income (NOI) by the property’s purchase price.
Carrying Costs – any expenses necessary to rehab a property until the point at which it is either rented or sold and begins returning some of the initial investment.
Debt-to-Equity Ratio – this ratio is used to determine how much of the home is owned by the owner. It compares the total amount the owner has invested in the equity. Equity – the difference between the current value of a property and the amount still owed on the mortgage. This amount accumulates over time as the mortgage’s balance decreases and the home’s value experiences appreciation.
Net Operating Income (NOI) – a calculation of net yearly income calculated by deducting operating expenses from the annual income generated by a property.
Passive Income – taxable earnings resulting from the operation of a rental property with which the owner is not actively involved. Return on Income (ROI) – the measurement is taken of a property’s net profit to the owner relative to total acquisition costs. ROI is calculated as a percentage.
Whether you’re new to the rental property market or simply looking for a better solution for your property management needs, it’s important to develop a solid understanding of the terms involved. Please reach out to Home365 for more information regarding our Las Vegas, Orlando, Houston, or LA property management services or to request a quote.