New to real estate investment or need to brush up on commonly used terms? In this article, we will quickly go through some of the words that frequently appear in conversations and transactions related to real estate investment.
1. Acquisition cost
The total price, including all fees (mortgage, closing costs, inspection fees, etc.) required to purchase an investment property.
2. After repair value (ARV)
After-Repair-Value or ARV is the estimated value of a real estate property after all the renovations have been completed.
ARV is used by real estate investors to compare a property’s all in costs and what the property value should be when the project is complete.
You also need to assess the “comps” or comparables. These are properties that have sold in the neighborhood and are comparable in property age, condition, size, and style. If you could find 3-5 comparable properties, take note of their average sale price since that would give you an idea what your ARV would look like.
3. Bridge loan
A short-term loan a homeowner takes out against their property to finance the purchase of another property. It is an interim financing before the next stage of financing or to cover an interval between two transactions. Bridge loan is usually taken out for a period of a few weeks to up to three years and the money from the new financing will be used to pay back the bridge loan.
4. Cash flow
The amount of money that an investor can take home at the end of each month after payment of all operating expenses, including loan payments. Cash flow can be either positive–if you spend less than you earn, or negative—if the spending is more than the earnings.
5. Cash on cash return (CoC)
CoC is cash flow before tax, a pre-tax calculation that measures the percentage of return on the actual cash invested in a property, which is used to assess or analyze the potential investment opportunities.
The final stage of the real estate transaction, the closing date is agreed upon by both the buyer and seller to legally transfer the property from seller to buyer.
7. Comparable sales
Also known as ‘comps’, comparable sales are used by real estate investors and appraisers to assess how much a home is worth based on what other similar homes in the area have sold for recently. Only homes that have legally closed would count and most lenders and insurance providers require appraisers to use at least three closed sales.
8. Credit score
A number between 300 and 850 that depicts the creditworthiness of an individual based on an analysis of their credit history. It is usually used by lenders to determine if someone qualifies for a loan, the credit limits, and interest rate.
The property’s present market value minus any outstanding mortgage amount that exists. Equity is the percentage of the home that a homeowner owns because while he is considered a homeowner, he does not own the property fully . The more he pays down the mortgage balance and the more the property appreciates over time, the more equity he has in the property.
10. Hard money loan
An asset-based loan issued by private lenders. Typically quick to fund (Longleaf Lending can fund in as quick as 2 days) but have higher interest rates than conventional loans. This short-term loan that is used to acquire and rehab investment properties. Hard money loans typically fund 100% of repair costs and ~90% of acquisitions costs.
See also: How does a hard money loan work?
11. Loan-to-value ratio (LTV)
The ratio that lenders use to measure the amount of the loan compared to the value of the property and to assess the overall risk before approving the loan. Loan assessments with higher LTV are higher risks and thus would require higher interest rate or may require the borrower to purchase mortgage insurance. Lower LTV would require borrowers to come up with larger down payments.
The formula for computing LTV is:
The LTV = Mortgage amount ÷ appraised property value (or sale price)
12. Loan origination fee
The amount charged by the lender for processing your loan. This includes evaluating, underwriting, and submitting your loan. Typically, the charge is 1% of your total loan balance.
13. Long-term rental
The traditional type of rental property where tenants sign a lease for a longer period of time typically 1 year or more.
14. Short-term rental
Short-term rental properties is a furnished living space; a type of rental property only leased for a short period of time usually less than a month for vacationers.
See also: How to manage a rental property: the do’s and don’ts
15. Multi-family home
A residential property designed with more than one housing unit to house different tenants in separate units. Good examples are duplex, townhouse, or apartment complex. The owner can choose to occupy one of the multi-family units and this is referred to as owner-occupied property.
16. Single-family home
A free-standing residential property designed as a single dwelling with its own land, no shared walls, and unattached to any other residential or commercial properties.
17. Off-market property
A property that has been sold or is in the process of being sold without any public knowledge or advertisement. Off-market properties are not listed on the public multiple listing services for sale. Reasons for off-market sales include maintaining privacy, creating exclusivity, or even to save on commissions.
18. Pre-approval letter
A letter offered by a lender before you start looking for a home or apply for a mortgage to determine what you can afford. It assures home sellers that you can be granted a loan when needed.
19. Proof of funds
A document that demonstrates a person’s capability to pay or the availability of funds for a particular transaction. It could be a statement from a financial institution that the buyer has enough funds to proceed with an offer to the seller.
A Real Estate Investment Trust is a company that buys, and operates income-generating real estate properties using investor money. It is just like mutual funds, except they hold individual properties in a trust, rather than stocks and bonds. There are different kinds of REITs that you can invest in and it will help to diversify your portfolio as a real estate investor. Some REITs include retail, residential, healthcare, office, and mortgage.
Need help with funding your real estate investment project? Reach out to us by calling 979-200-2823 or email us at firstname.lastname@example.org.