When you’re starting out as a property investor, the plethora of real estate investing terms might sound like nothing more than a lot of incomprehensible jargon. These hard-to-pronounce terms can initially seem somewhat intimidating. However, it is essential for investors who want to break into the real-estate sector, to familiarize themselves with these terms, concepts, and definitions.
Having a solid understanding of the basic concepts and definitions pertaining to the real-estate sector will help you maximize the utility and security of your residential investment properties. Knowing the common terms and phrases associated with owning, renting, and buying residential property will also enable you to easily follow negotiations and communicate effectively with individuals and businesses operating in the industry.
Common Real Estate Investing Terms
The most common and widely used real estate investing terms can be divided into five broad categories. These are – ‘deciding to buy’, ‘buying and carrying debt’, ‘owning’, ‘assessing finances’, and ‘renting’. Potential residential property investors must understand the significance of these categories and the terms associated with them in order to maximize the efficiency and profitability of their business operations.
So, if you’re planning to dive into the real-estate sector in the near future, check out the list of common real estate investing terms below.
This is one of the most important terms associated with the ‘deciding to buy’ category in the realm of real estate investment. Appraisal refers to the objective value of a property determined on the basis of its condition and comparable listings through a lender-driven survey.
This term refers to a clause in the purchase agreement that grants the person buying the property the right to inspect the residence with the help of an independent inspector, for the purpose of receiving a report about the problems and general condition of the house.
This is simply a third-party financial account meant to temporarily hold the amount of money that a buyer will pay the owner of the residential property being purchased. The money is typically held in escrow until all negotiations are complete, in order to prevent fraud or misuse of funds.
In real estate investing, the term ‘interest’ refers to the cost of borrowing funds for a mortgage. The principal can be paid off over a number of years along with an additional amount (known as the ‘interest’) accruing on a yearly basis at a rate set by the lender.
Appreciation and depreciation
These two terms refer to an increase and a decrease in the value of a real estate property over time, respectively. The increase or decrease in value could be caused by various factors such as inflation, increased demand, weakening supply, wear and tear, etc.
This term describes an investment format wherein the owner or investor lives far away from the investment property and manages it remotely with the help of a property management company. This allows investors to invest in far-flung markets that offer higher returns.
Capital expense reserves
In real estate investing, the capital expense reserves are the amounts of money set aside each year for the purpose of covering large potential expenses in the future. Such expenses might include roof replacements, HVAC system repairs, new appliances, etc.
Tenant screening: This is the process by which the potential tenants of a residential property are screened before a house is rented out. Background and credit checks, personal interviews, reference checking, and a comprehensive vetting process are often major elements of tenant screening.
Investing in residential property can be quite expensive as well as time-consuming. One of the reasons investors still opt for real estate investing is that, when done right, it can provide a steady source of passive income for years to come. However, in order to make smart and effective investments in residential properties, potential investors must familiarize themselves with the relevant terms and definitions so that they’ll be able to navigate the market with sufficient awareness and confidence to make the right investment decisions at the right time.
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