Essential Terms All Real Estate Investors Should Know

Accessory Dwelling Unit (ADU)

An ADU is an additional living space on the same property as the main house. It could be a small apartment over a garage or a separate guest house.

ADUs are popular because they provide extra income through rent or can be used for family members who need a private living space.

Accredited Investor

An accredited investor is someone who meets specific financial criteria, such as having a high income or net worth.

This status allows them to invest in opportunities not available to the general public, such as certain hedge funds, private equity deals, or startups, giving them access to potentially higher returns.

Adjustable Rate Mortgage (ARM)

An ARM is a loan where the interest rate can change over time. Initially, the rate might be low, but it can go up or down based on market conditions.

This means your monthly payments may increase or decrease, making it riskier than a fixed-rate mortgage where payments remain steady.

Airbnb Arbitrage

Airbnb arbitrage is a strategy where you rent a property for the long-term and then sublet it for short-term stays on Airbnb.

You make a profit by charging a higher price for the short-term rental than what you pay in rent. This lets you earn income without owning the property.

Amortisation

Amortisation is the process of paying off a loan through regular payments over time. Each payment is split between paying off the loan’s principal (the amount you borrowed) and the interest.

At the start, most of the payment goes to interest, but over time, more goes toward the principal.

Closing Costs

Closing costs are the fees you pay when finalising a real estate deal. They are paid in addition to the property’s price and can include things like loan fees, appraisal fees, taxes, and title insurance. Buyers and sellers typically split these costs, but the amounts can vary.

Cap Rate (Capitalization Rate)

The cap rate is a way to measure the potential return on an investment property. It’s calculated by dividing the property’s net income (after expenses) by its purchase price. A higher cap rate means a better return on investment, helping investors compare properties more easily.

Cash Flow

Cash flow is the money you have left after paying all property expenses, like mortgage payments, taxes, and maintenance.

If you have positive cash flow, it means the property earns more than it costs. This is a key measure of a property’s profitability for real estate investors.

Depreciation

Depreciation allows property owners to reduce their taxable income by accounting for wear and tear on a property over time.

For rental properties, this is usually spread over 27.5 years. Even though the property may increase in value, depreciation helps lower your tax bill each year.

Equity

Equity is the difference between what your property is worth and what you still owe on it. For example, if your property is worth $300,000 and you owe $200,000 on your mortgage, you have $100,000 in equity. As you pay off the loan, your equity increases.

Fix and Flip

“Fix and flip” refers to buying a property in need of repairs, upgrading and maintaining it, and then selling it to make a profit. Investors look for properties they can buy cheaply, renovate quickly, and resell at a higher price.

Leverage

Leverage in real estate means using borrowed money, like a mortgage, to buy a property. By borrowing, investors can buy more expensive properties or multiple properties with less of their own money. While it increases potential profits, it also adds risk if property values drop.

ROI (Return on Investment)

ROI measures how much profit you make on an investment compared to how much you spent. It’s calculated by dividing your net profit by your total investment.

A high ROI means you’re making good returns. Investors use ROI to compare different properties or investment opportunities.

Underwriting

Underwriting is the process where a lender evaluates your financial situation to decide if they should give you a loan.

They look at things like your credit score, income, and the property’s value. The underwriting process helps the lender determine the loan’s terms and interest rates.

Vacancy Rate

The vacancy rate is the percentage of time a rental property is empty and not earning income. A low vacancy rate means the property is rented out most of the time to long-term tenants, which is good for landlords. High vacancy rates suggest less demand for rental units in the area.

Zoning

Zoning laws regulate how land can be used in different areas. They decide if land can be used for homes, businesses, factories, or farms. Zoning affects property values and what you can do with the land.

Bottom Line

Mastering these essential real estate terms can significantly boost your confidence and success as a landlord.

Managing rental properties can still be overwhelming. That’s where AIM Real Estate Management comes in. Consider partnering with AIM Real Estate Management to make your property management journey smooth and stress-free!