Key Takeaways
Real estate terminology matters: Understanding industry-specific terms is crucial for clear communication and smarter investing decisions.
Key financial metrics guide profitability: Concepts like the One Percent Rule, Cap Rate, and Cash Flow help investors assess and compare property investments.
Legal and tax knowledge boosts returns: Familiarity with tools like the 1031 Exchange, Fair Housing Act, and Depreciation can provide tax benefits and legal protection.
Just like any other industry, the world of real estate operates on a certain list of jargon and acronyms. When thinking of real estate investing, it’s crucial to know their meaning for easier and effective communication with other real estate professionals.
In today’s blog, our property managers at Campus Connection Property Management have assembled some of the common terms that you should know as a beginner. To speak with one of our expert property managers, contact us today.
The One Percent Rule
This is a term that you’re likely to encounter when determining the monthly rent amount to charge tenants.
The formula estimates that the monthly rent amount to charge tenants should be at least one percent of the property’s purchase price to be a profitable investment.
Hard Money Lender
This is a private financier who provides real estate investors with short-term loans. Usually, such investors don’t qualify for loans from conventional banking institutions.
1031 Exchange
This is a section of the US Internal Revenue Code that allows property investors to have a tax break when exchanging one investment with another. You must meet certain conditions, though, for you to be eligible to defer the capital gains.
Capital Gains Tax
This is a tax that the IRS requires to be filed after the sale of a property. How much you pay depends on a few factors. Including how long you’ve had the property, the taxable income, and filing status.
Cap Rate
This is also referred to as the capitalization rate. This is the ratio of a property’s net operating income versus its cost of acquisition. The ratio can help you compare the potential profitability of one real estate investment over another.
Fair Housing Act
This is an anti-discrimination law that was passed in 1968. It prohibits discrimination against renters and home buyers based on certain protected classes like race, color, nationality, sex, and familial status.
Absorption Rate
This is a rate that evaluates the supply and demand of housing in a rental market based on how quickly homes are sold. If the absorption rate goes beyond 20 percent, the housing market is considered to be a seller’s market.
A seller’s market is one where there’s a shortage of housing. In other words, the number of potential buyers exceeds the supply of housing. This gives sellers an advantage in negotiating prices and conditions.
However, if the absorption rate dips below 15 percent, the housing market is said to be a buyer’s market. Here, there are more homes for sale than there are buyers.
Debt-to-Equity Ratio
This is a ratio that looks at the loan amount owed to the lender versus the amount owned by the property owner. Another similar ratio is the debt-to-income ratio. This looks at the monthly debt amount owed by an individual versus their gross monthly income.
Acquisition Cost
This refers to the cost of buying a piece of real estate property. The cost includes the mortgage fees, closing costs, inspection fees, and real estate commissions.
Income Property
This often refers to either a short-term or long-term rental property. The goal of the investment is to generate a consistent rental income.
Cash Flow
This refers to the amount of money a property investor keeps after subtracting all expenses. It’s the difference between the rental income and the running costs.
Cash flow can either be positive or negative. Positive cash flow is when the rental income exceeds the operational costs, and thus is profitable. Whereas, negative cash flow occurs when the operational costs exceed the rental income, thus resulting in losses.
Airbnb
This is one of the most popular websites that contains millions of short-term vacation listings. Property owners who list their short-term rentals are referred to as hosts.
Mortgage
This is a loan that an individual can secure from a financial institution to finance a rental property purchase.
Amortization
When you obtain a mortgage loan, a share of the monthly payment goes towards the interest and another towards the principal. Amortization shows you how the monthly payment applies in that regard.
Closing Costs
This refers to the money an investor pays as part of the property acquisition costs. Closing costs can include appraisal fees, underwriting fees, origination fees, title search, and title insurance.
Apartment
This is a residential building that contains multiple individual housing units within it. Examples of apartments include duplexes, triplexes, and studios.
Credit Score
This is a numerical expression that looks at a person’s creditworthiness. Lenders commonly use it as one of the qualifying criteria for loan amounts and interest rates.
Occupancy Rates
This refers to the number of occupied rental units versus the total number of units in a rental building.
Property Manager
This refers to an individual or a company that specializes in the professional management of rental properties.
They can help in determining rent amounts, managing tenants, property maintenance, and rental marketing, among other duties. Campus Connection Property Management's team of experts can bring landlords peace of mind and oversee all day-to-day operations. Learn more about our expertise.
Appraisal
This is an objective estimation of the value of a property done by a certified professional. The appraiser usually bases their calculation on the values of similar properties in the area.
Real Estate Appreciation
This refers to the increase in the value of a piece of real estate over time. It usually occurs due to factors such as increased demand, inflation, or weakening supply.
Depreciation
This is a form of tax savings, where a property owner may be eligible to deduct the cost of obtaining and improving their property over time. For residential properties, the recovery period is capped at 27- and a half years.
Operating Expenses
These refer to the costs of running a rental property. Examples include renovations, repairs, utilities, property taxes, and mortgage payments (if any).
Property Diversification
This is the distribution of properties across different real estate markets by an investor to minimize risk and maximize long-term profit.
Down Payment
This is the amount of money that a lender may require you to put down when buying a property through a mortgage facility. The standard minimum down payment for a conventional mortgage is 20%.
Conclusion
This list isn’t exhaustive by any means. However, it contains some of the most popular terms you’ll come across in your quest to become a real estate investor.
For expert real estate services in the Eugene/Springfield area, look no further than Campus Connection Property Management. We can help you overcome any and all challenges. Get in touch to learn more!
