15 Real Estate Investing Terms You Should Know
Investing in real estate is not a decision to take lightly, since hard-earned money is at stake. Doing your research and understanding real estate terms can be an incredibly powerful tool when it comes to making real estate investments. Getting familiar with real estate vocabulary is an important first step for real estate investors in their journey to make smart decisions with their money and maximize the return on their investments. Knowing the real estate terms and laws associated with investing can give you a leg up and greatly improve your chances of success. Let’s break down the top 15 terms that you should be familiar with.
The BRRRR method is an acronym that stands for Buy, Rehab, Rent, Refinance, Repeat. This is a powerful method that real estate investors use to maximize their returns and create passive income. The concept works best when real estate is purchased below market value or in other words – not move-in ready.
ARV is an acronym for After Repair Value. This is an estimate of a property’s value after needed repairs and improvements are performed. Before beginning any repairs or improvements, it is wise to get an accurate estimate of what the property will be worth post-renovation. This can help you make informed decisions on which projects to prioritize and set a reasonable budget you can follow.
DOT is an abbreviation for a Deed of Trust. A Deed of Trust is a legal document used in a real estate transaction between 3 parties; the borrower, the lender, and an impartial trustee. In exchange for a loan of money from the lender, the borrower places legal title to real property in the hands of the trustee who holds it for the benefit of the lender, named in the deed as beneficiary.
4. CAP RATE
In real estate terms, this describes the rate of return on an investment property based on the expected income generated by the property. Cap Rate is calculated by dividing a property’s net operating income by the current market value. This ratio, expressed as a percentage, is an estimation of an investor’s potential return on investment.
5. OWNER FINANCING
Owner financing—also known as seller financing—lets buyers pay for a new home without relying on a traditional mortgage. Instead, the homeowner (seller) finances the purchase, often at an interest rate higher than current mortgage rates and with a balloon payment due after at least five years. If you’re in the market for a new home but are having trouble winning loan preapproval, owner financing is an alternative that can keep your dream of homeownership within reach. Though not all sellers will be willing—or able—to provide direct financing to the buyer, it can be an excellent way to buy a property while also simplifying the closing process.
A phrase that stands for Real Estate Investment Trust. A REIT is a type of real estate investing in which multiple investors pool their money in order to purchase a subject property and then split the profits generated by the said property.
7. GROSS RENTS
Gross rent is the amount of rent stipulated in a rental lease. When you sign a lease, you agree to pay a certain amount each month, and the combined amount of all monthly rental payments is your annual gross rent. if your monthly rent is $2,000 and you have a one-year lease, your annual gross rent would be $24,000.
8. 1031 EXCHANGE
A 1031 exchange is a swap of one real estate investment property for another that allows capital gains taxes to be deferred. The properties being exchanged must be considered like-kind in the eyes of the IRS for capital gains taxes to be deferred. This method is often used by savvy real estate investors as a tax-deferred strategy to build wealth.
9. FIX & FLIP
Also referred to as house flipping – this is the act of purchasing a property, rehabbing it, and then selling it for a profit.
Wholesale real estate refers to a short-term business strategy that investors can use to make a quick and steady income in the real estate market. In wholesale real estate transactions, the wholesaler enters into a purchase contract for a home from a seller, for a small earnest money deposit.
11. SUBJECT TO (SUBTO)
The language used to set forth contingencies in a contract. In real estate, subject to means that you’re buying a home that’s subject to an existing mortgage. Under normal circumstances, what happens when a homeowner sells a property in which the mortgage hasn’t been fully paid off? Most often, the proceeds of the sale are used to pay off the remaining mortgage, and the seller pockets the rest.
12. TITLE INSURANCE
Title insurance is a form of indemnity insurance that protects lenders and homebuyers from financial loss sustained from defects in a title to a property. The most common type of title insurance is lender’s title insurance, which the borrower purchases to protect the lender.
13. PROMISSORY NOTE
A promissory note is a debt instrument that contains a written promise by one party (the note’s issuer or maker) to pay another party (the note’s payee) a definite sum of money, either on demand or at a specified future date. A promissory note typically contains all the terms pertaining to the indebtedness, such as the principal amount, interest rate, maturity date, date and place of issuance, and issuer’s signature.
ROI is an abbreviation used for the phrase Return on Investment. In real estate terms, this metric describes the profit earned on a real estate investment after deducting all associated costs. This metric helps real estate investors evaluate whether they should buy one property or another.
Another type of crowdfunding real estate investment in which investors pool their money and the syndicate handles purchasing, managing, and/or selling a property before dividing the profits among the investors.
ABOUT JIM THORPE & SUMMIT CAPITAL PARTNERS
Jim Thorpe is a Seattle-based entrepreneur And real estate expert with over 30 years of experience in real estate development. He works to find high-demand properties in low-inventory areas for both developers and homeowners alike. One of his specialties is locating single-family homes in property parcels zoned for multi-family development. His rental portfolio now includes houses, apartments, and commercial properties. Thorpe’s dedication to his business has led to city-wide growth and development in the real estate sector.
Summit Capital Partners is a real estate development and management firm that operates out of Puget Sound and is owned by Seattle real estate expert, Jim Thorpe. They work to acquire off-market real estate and specialize in developing risk-adjusted solutions, allowing an asset’s value to increase over 6-12 months. Summit Capital aims to make a difference in the community where they do business.