As you start the journey into real estate investment, it is important that you learn the language of landlordology. Without a clear understanding of the terms, it is easy to get confused in the world of real estate quickly.
Luckily, we have the complete guide to landlordology with all of the basic real estate investing terms you need to know. Let’s take a closer look.
Landlordology: 45 terms you need to know
If you want to succeed at real estate investing, it can be helpful to understand landlordology. Here are the terms you need to know.
Cap rate is provided by a formula that real estate investors can use to evaluate the profitability of a property. The cap rate is a ratio between the net operating income to the property’s value. The goal of the ratio is to determine the percentage of investment return that the property will generate each year.
Net operating income
Net operating income is often referred to as NOI. The NOI is the total revenue of a property minus any required operating expenses.
The cash flow of a property indicates whether or not a property is generating a positive income or negative income. Essentially, cash flow is the amount that an investor can pocket or has to pay out each month after all expenses.
For example, let’s say a property rents for $1,000 with $100 in expenses. With that, there would be a positive cash flow of $900.
This is an abbreviation for Capital Expenditures. CapEx is the cost of any major renovations or new purchases that significantly extend the life of the property. For example, replacing a roof would count as CapEx.
Since every property will eventually need repairs that qualify as Capital Expenditures, it is a good idea to save for these inevitable costs in advance.
Section 1031 of the IRS tax code allows a property owner to defer capital gains taxes in order to exchange certain types of property. Essentially, you can delay your taxes on the income from the sale of one property if you are putting that money towards the purchase of another similar property.
HOA fees are also known as homeowners association fees. Depending on the property you buy, it may be within a homeowners association. If the property falls under the supervision of a homeowners association, then there will be fees associated with that.
Typically these are monthly or annual fees that are intended to maintain the subdivision or condominium. You should ask about these fees before closing on a property.
Gross rental yield
As you explore potential properties, gross rental yield can help evaluate the return on investment. You can find the gross rental yield by dividing the total income generated by the property in a year by the price of the property plus closing costs.
Appreciation is a term to describe the rise in a property’s value over time.
Adjustable-Rate Mortgage (ARM)
An adjustable-rate mortgage is a type of mortgage with an interest rate that can change over time. In most cases, the interest rate is set for a few years but then changes at regular intervals. With that, your mortgage payment could increase or decrease based on the current market conditions.
A fixed-rate mortgage has an interest rate that is set for the duration of your loan term. With that, the monthly mortgage payment will never change. A fixed-rate mortgage can be a good idea for investors that want a reliable number to budget around.
Equity is the amount of value that you have stored in the home or the difference between the current market value of the property and the amount that you own on the mortgage.
A turnkey property is move-in ready when you purchase the property. In this case, you should be able to take the keys and move-in to find tenants immediately. In contrast, homes that are not turnkey could take weeks or months of intensive renovations.
Capital gains tax
Capital gains tax is based on the capital gain or loss when you sell the property. If the property sells for more than you bought it for, the difference in price is considered a capital gain. However, if the property sells for less than you bought it for, then the difference in price is considered a capital loss.
The tax code distinguished between long-term and short-term capital gains. Long-term capital gains are taxed at a more favorable rate than short-term capital gains. If the property is bought and sold within one year, then it could be considered a short-term capital gain and taxed accordingly.
If you took out a mortgage to finance the property, the debt-to-equity ratio can help you determine how much of the property you actually own vs how much you owe. You can determine the debt-to-income ratio by comparing the outstanding debt to the equity you’ve built in the property.
If you are looking to qualify for a mortgage, a lender will look at your debt-to-income ratio. A high debt-to-income ratio will indicate a higher risk to the lender. With that, a high debt-to-income ratio can lead to less favorable loan terms.
When you make an offer on a property, a portion of the down payment will be held by an impartial third-party in a separate bank account until the transaction is completed. This process is referred to as escrow.
Escrow can help to remove risk from the transaction for both the buyer and seller. With the escrow safely stored, both can feel comfortable until the conditions between both parties are met.
When you purchase a property, there are a variety of fees that are collectively referred to as closing costs. Both the buyer and seller may have closing costs. In general, you should estimate spending between 2 to 5% of the purchase price in closing costs. With that, it is an important expense to budget for.
When you make an offer on a house, you can include an inspection contingency. If the property doesn’t meet your reasonable expectations, you could back out of the offer or negotiate a new purchase price with minimal hardship.
The MLS stands for Multiple Listing Service. There are hundreds of MLSs around the country. Licensed real estate agents can access listings through the MLS.
FSBO stands for For Sale By Owner. In this case, a property’s owner is listing the property without the help of a real estate agent. Depending on the market conditions, this could be a good opportunity for buyers and sellers.
CMA (Comparative Market Analysis)
A CMA, or comparative market analysis, can help you understand the broad picture of current market trends. Typically, these reports are generated through an MLS, which means that off-market deals will be missing. But overall, it is a good way to gather information in order to determine a fair market value for their home.
NAR (National Association of Realtors)
The National Association of Realtors has over 1 million members working in residential and commercial real estate industries. There are high ethical standards to maintain within the NAR. This professional affiliation can help you find a good realtor.
PITI stands for Principal, Interest, Taxes, and Insurance. If you are making a monthly mortgage payment on a residential property, then you are generally paying the PITI.
FMV (fair market value)
The fair market value (FMV) of a property is a reasonable price that is fair to both the buyer and seller based on current market conditions. As a buyer or seller, it is important to do your research to determine the FMV of any properties you are interested in.
LTV (loan to value ratio)
The LTV, or loan-to-value ratio, is a percentage that measures the total debt on a property in comparison to the market value of a property. Generally, lenders will not want to commit to a property with an LTV higher than 80%.
FHA is an acronym for the Federal Housing Administration. This is the government agency that backs FHA home loans, which allow for low down payment options. Plus, FHA borrowers can have relatively low credit scores.
Gross rental income
Gross rental income is the amount that the property owner collects in rent and additional fees. Anything refundable, such as a security deposit, is not considered a part of gross rental income.
A single-family home, or SFH, is a standalone house that doesn’t share walls with any other properties.
A multi-family home, or MFH, is a building with multiple separate units inside. For example, a duplex or triplex would be considered a multi-family home.
Gross rent multiplier
The gross rent multiplier can help you evaluate the investment potential of a property by comparing the gross annual rent with the fair market value.
PMI, or private mortgage insurance, is a monthly cost for the borrower that protects the lender in case of default.
REO (Real Estate Owned)
REO, or real estate owned, is property owned by the bank or lender that hasn’t been sold after a foreclosure.
A property manager can help a property owner run the day to day of a property.
A rental property is one that is being leased to a tenant.
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A short-term rental is one in which the tenants are there for a few days or months. For example, an Airbnb or VRBO rental would fall into the short-term category.
A long-term rental is one in which the tenants are there for a longer period of several months or a year.
A seller’s market is highly competitive for buyers. Typically, houses are in high demand with high prices and bidding wars.
A buyer’s market is less competitive, with more choices available at better price points for buyers. Sellers will not have the advantage in this case.
A pre-approval letter is given to you by a lender to confirm what you can afford. This letter can provide peace of mind for sellers.
Hard money loan
A hard money loan is issued by private investors or organizations based on the assets of the borrower. Although the interest rates can be higher, they are often more quickly funded.
A credit score is a three-digit number that offers lenders an idea about your creditworthiness. Depending on your credit score, you might face challenges receiving a loan.
Real estate agent
A real estate agent has a license that allows them to represent you in a real estate transaction. A real estate agent often works under a real estate broker.
Real estate broker
A real estate broker is a professional that can represent buyers and sellers in real estate transactions. However, they are able to work independently.
Rehabilitation cost is the price you pay to make repairs or update the property. Generally, this will lead to an increase in the total value of the property.
Now that you know more about the landlordology of real estate investment, you’ll feel more comfortable wading through the jargon.
When you are ready to start your own real estate investment portfolio, take advantage of our free guide to real estate investment. It will help you learn more and start on the right foot.