10 Terms All Real Estate Investors Should Know
Similar to any other industry or sector, the property market has its own set of unique terms and acronyms. Understanding the real estate jargon is key if you’re an investor looking to sink their funds into a property. Without an understanding of these terms, it’s easy for an investor to feel overwhelmed.
To help you make sense of these terms and communicate effectively with other real estate professionals and service providers, the team from Evolve Real Estate and Property Management has put together a few key terms that every potential property investor and landlord should know.
Appreciation
Appreciation can be described as the increase in property value over time. There might be several reasons for the appreciation of property value including an increase in population, fiscal inflation, increased desirability of an area, and the development of infrastructural projects in the neighborhood.
On the other hand, there can also be depreciation, which is a decrease in the value of the property. It can be attributed to economic depression or a change in a demographics’ tastes and preferences.
Buyers’ Market vs. Sellers’ Market
The property market is prone to variations in its performance by virtue of it being a multi-faceted asset. Two scenarios, in particular, are known as a buyers’ market and a sellers’ market.
A sellers’ market occurs when the supply of housing units in an area cannot match up to the demand. Since they are more buyers than there are willing sellers, the sellers can take advantage of this and demand a higher price.
In a buyers’ market, the opposite is true. The demand for real estate is significantly lower than the supply. In such a scenario, the prices of property tend to be low since the negotiating power lies with the buyers. Potential property buyers have several choices to work with therefore a seller would be willing to offer discounts to secure a sale.
Net Operating Income (NOI)
This term refers to the income generated from the investment property minus all property expenses and costs. The income to be considered is not only accruable from rent, but also from parking fees and other amenities offered, for example, pet rent or pet fee. The expenses to be deducted may include utilities, property management fees, and property tax among others.
Debt-to-Income Ratio
This measure is used by financial institutions and mortgage companies to compare the monthly debt repayments of the property owner to the possible gross income accruable. The debt-to-income ratio will advise the financial institution on how to proceed.
1031 Exchange
As explained above, if a property owner enjoys an increase in the value of their investment property, capital gains tax would be levied upon sale. However, this is not always the case if the requirements of the 1031 exchange are met.
This mechanism is provided for by the Internal Revenue Service, allowing for an investment property owner to defer all capital gains tax. The proceeds gained from the sale of the property must be reinvested in a property of equal or greater value. There are other requirements such as holding time and timelines that must be met for the 1031 exchange to be valid.
Turnkey Property
A turnkey property is one that can be immediately leased by a tenant once purchased. Investors looking to purchase such property should approach companies that specialize in the rehabilitation of older properties.
With its renter-ready status, you can expect everything in the property to be in ideal condition, from the electrical and plumbing to lighting fixtures to curb appeal.
Capital Gain Tax
Due to the changes in the economic climate, demographics/ population, or infrastructure developments in the neighborhood, a property’s value may increase or decrease after purchase. Capital Gain (or loss) is the difference between the purchase price and the property’s value. The difference is attained after the purchase of the property has been realized.
Therefore, capital gains tax is applied to the growth in the property’s value. The levy is not applied uniformly and depends on the tax bracket of the property owner.
The Homeowner’s Association
Also known as HOA, the homeowner’s association determines and enforces property regulations and rules within a neighborhood, subdivision, or community. Every property owner and their occupant (in the case of a lease) are expected to adhere to the terms set by the HOA.
Every property owner is a member of the HOA and is expected to pay HOA fees. The fees are used to maintain and improve the amenities within the community. Proprietors are reminded to factor in HOA fees in their investment analysis.
Escrow
Escrow involves the inclusion of an unbiased third party in the sale of the property to hold on to the agreed price on behalf of the parties. The funds will be released to the seller once certain conditions have been met.
Rent-to-Own (RTO)
This arrangement can be considered a complex combination of a property purchase agreement and a lease agreement. Every rental payment made makes up part of the property’s purchase price.
It’s a purchase model that comes highly recommended. For the purchaser, it’s an affordable option that avoids the use of mortgages and other financing methods.
Conclusion
There you have it! These are just some of the terms that you’ll need to know in order to make sound real estate investments.
Do you feel out of your depth? It’s a common feeling given the technical aspect of the real estate market. The good thing is that you don’t have to be alone on this journey. Call upon the leading property management company Evolve Real Estate and Property Management.
We are a full-service management company, known for our tailor-made solutions. Purchasing a property can be a stressful scenario if not handled correctly. Put your trust in our team! Contact us today to learn more about our services.
