Decoding Property Investment Jargon: A Comprehensive Glossary for Investors
There can be plenty to learn for those new to investing.
From investment strategies to market trends, and the laws and regulations surrounding investing, there is no shortage of new concepts to get your head around.
But learning all this can be even more difficult when you don’t understand the real estate terms being used to enhance your knowledge.
There are a range of real estate terms to know that are specific to the property investing industry.
So, we thought it would be helpful to start decoding some of this real estate vocabulary which is commonly used by investors.
Adjustable-rate mortgage: this is a type of mortgage where the interest rate can change over the period a loan is being repaid.
Assessed value: the real estate’s value that can be used to assess the property tax rate.
Buying Agent: an individual who can be hired to assist a potential buyer find and purchase a property.
There are a range of pros and cons to using a buyers agent, as well as plenty of differing opinions on whether they are necessary, so make sure you do your research.
Capitalisation rate: also referred to as cap rate, this is a metric that can determine the potential return you make on an investment property.
Comparative market analysis:this refers to the process used to assess what a property is worth, depending on similar houses in the same market or area.
You might find it worthwhile to view this video.
Debt-to-income ratio: a metric used to assess a household’s financial status by comparing monthly debt payments to gross monthly income. It is commonly used by lenders to determine the risk involved in issuing a loan.
Down payment: also known as a deposit, this is the amount a buyer would need to pay upfront in order to secure a mortgage or loan on a property. A typical loan amount is around 10-20% of the property’s value.
Equity: this term has a variety of meanings, depending on the context it’s used in.
In a real estate dictionary, equity would refer to the difference between the current market value of a property and the outstanding amount owed on the mortgage.
For example, if you owned a property valued at $500,000, and still had $350,000 owing on the mortgage, your equity is $150,000.
Fixed-rate mortgage: often considered the alternative to an adjustable-rate mortgage, a fixed-rate mortgage is where the interest rate remains the same over the period that the mortgage is being repaid.
Home inspection: an inspection that a potential investor will pay for prior to buying the property, in order to determine the home’s condition and whether it is in a liveable state.
Interest: quantified as a percentage, interest is the fee associated with borrowing money from a lender. In real estate terminology, interest is the amount you have to pay in addition to the mortgage (it may be fixed or adjustable).
Mortgage: a type of loan most often used for purchasing real estate, typically a residential property (a house, apartment, townhouse, etc). Keep in mind that the property will be collateral for the lender if the mortgage is not repaid according to the terms of the agreement.
Net operating income: a metric used to determine the overall profit generated by a property, typically in commercial real estate. The formula to determine this value is:
Total Revenue – Operating expenses = Net operating income.
Negative gearing: a strategy often used by investors that involves owning and managing a property where the expenses exceed the income generated through rental income. This often results in tax benefits for the owner.
For a bit more on negative gearing, and why it may be a good or bad thing, check out the video here.
Principal: in the investing context, this is the total amount borrowed from a lender or bank (usually the value of the house, minus the deposit). This value excludes any interest, earnings, or profits that may accrue over time.
Offset account: a regular transaction account that is connected to your mortgage where the balance in the offset account is subtracted from the outstanding principal of your mortgage when calculating the interest charges. This allows you to only pay interest on the remaining loan amount after deducting the balance in the offset account.
Private Mortgage Insurance (PMI): this is typically an additional fee or payment that investors will have to pay lenders if they don’t meet a minimum deposit amount. This acts as an insurance policy in case the borrower goes into default.
Refinancing: in order to get a better interest rate, an investor will replace a current mortgage loan with a new one with different terms. This is referred to as ‘refinancing.’
‘Rentvesting’: a strategy where real estate investors will rent a property to live in themselves, but also own a property investment elsewhere that they simultaneously rent out to others.
This allows the investor to reap all the benefits from potential rental income and capital appreciation but not have to commit to living in that property.
Return on Investment (ROI): a financial metric that can be used to determine the profitability of an investment relative to the cost of the home. It is usually expressed as a percentage, with the formula being:
ROI = (Net Gain from Investment/Cost of Investment)× 100%
So, there you have it – some key terms that will help advance your property investing education and make it that little bit easier to understand what everyone is on about.
But remember these are just some of the terms used by experts and should only form a baseline for your education.
It’s one thing to know what these terms mean, but knowing how these strategies and processes can be used for financial gain or avoiding risk is a whole other skillset.
That’s why it’s important to continue educating yourself at every step of the journey and staying up-to-date on the ins and outs of the property investing world.