Investing in real estate can be a tricky and challenging territory to conquer, especially when you are unsure about many of the terms commonly used in the investment real estate industry. So, we are here to help.
Cap Rate. This is also known as the capitalization rate and is something used to measure the annual rate of return on an investment based on the projected profit.
Comps. This is a term used to describe the similarities between the size, location, and condition of properties in the same area.
Inspection. An inspection of the property is done as a way to protect the investment of the buyer. It is a good way to address any problems right away and can reveal significant damage before the deal is done.
Good Credit Score. For investment real estate, a good credit score is 720 or higher. However, you may still get away with a score of 620.
Net Operating Income. Otherwise known as NOI, this is a measure of the property’s profit potential.
Cash Flow. This is the amount of money you would have at the end of each month after the operating expenses are taken care of for the property.
Gross Rental Yield. This is the total amount of income that the property generates, divided by the property cost and closing fees.
Appreciation. This is the increase in the value of your investment property over time.
Turnkey Property. This is appealing to an investor because no major repairs are needed, and the property is ready to go right away.
Capital Gains Tax. This is the difference in the property’s value compared to the original purchase price.
Internal Rate of Return. This is the measurement of the long-term profitability of a property, taking into account the annual net cash flow and the changes in equity.
Inspection Contingency. This is a term commonly found in the purchase agreement and allows the buyer to hire the inspector, receive the inspector’s report, and negotiate new costs according to the findings of that report.
Loan to Value Ratio. This is determined by the percentage of the property’s sale price or the value at which it is financed.
Debt Service. This is another way to say mortgage payment. It is the amount of money that is required to service the debt on the property you purchase.