Real estate has withstood the test of time and its advantages are well-known. Provided you invest in the right location and ideal property, you should be guaranteed consistent rental income, value appreciation, and myriad tax benefits.
However, before you move into the investment bit, you will need to start at the foundation of it all. Like any industry, property and real estate investment has jargon and keywords that every investor should know.
In this article, the team from House in Order Property Management, a leading property firm in the area, highlights the keywords that you should know.
Adjustable Rate Mortgage
Also known as ARM, this is a form of a mortgage loan offered where the interest rate fluctuates with the performance of the market.
This varies the amount of money paid per month by the borrower and can be challenging when the market is performing badly and interest rates are rising. A potential borrower should look out for a fixed-rate mortgage if possible.
Home/ Property Inspection
A property inspection refers to a deliberate assessment of the condition and structural quality of the development before any transaction.
This is done by a licensed and reputable home inspector. The inspection will be summarized into a report that a buyer or seller can use to their advantage during the process.
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Debt-to-Income Ratio
An important measure that you will need to compare and constantly adjust is the debt-to-income ratio. This measure compares your monthly payment to the monthly gross income of the property. When you go borrow a loan, most lenders will use this to calculate the viability of monthly payments.
Diversification
The property industry is a diverse one with several asset classes. Some of the different asset classes include residential, commercial, industrial, hospitality, data centers, and more.
Diversification refers to investing in different asset classes and employing different strategies to minimize risk and potentially maximize profit in the long run.
Absorption Rate
This is a numerical figure that measures the rate at which homes are acquired in a local market. It is a good measure of demand for certain properties by the local demographic.
From our experience, a rate higher than 20% is a market of a seller’s market (where demand outstrips supply). Anything below 15% is an indication of a buyer’s market (where supply is higher than demand).
Cap Rate
As an investor, you will hear this term used over and over. The Cap Rate is a measure of risk calculated by dividing the net operating income of the property by the purchase price/ market value.
When you are purchasing a property, you would want to compare the cap rates of various properties to determine their viability as an investment.
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Internal Rate of Return
This is another important metric for real estate investors. The IRR is used to estimate the discount rate at which the investor breaks even i.e. the Net Present Value of the income and the initial cost of investment is zero. Together with the Cap Rate and other measures, it evaluates the profitability of the investment.
Capital Gains Tax
This is one of the many taxes that property investors and owners have to contend with. It is paid by the seller and it’s a percentage of the profit made from the sale.
Capital Gains Tax depends on several items: the filing status, taxable income, and the duration of ownership. That said, the rate can vary from 0% to 20%. One can also take advantage of the 1031 exchange provided by the IRC.
1031 Exchange
This is a tax benefit that refers to Section 1031 of the IRC, the Internal Revenue Code. It allows an investor to exchange an investment asset for another should they be of a similar type. During this exchange, the seller would not be liable to pay capital gains tax. Not many investment asset classes can boast of such a tax benefit.
Buyer’s Market
This is a scenario (mostly in a local market) where the demand for properties is significantly lower than the supply. With a large inventory, properties take longer to transact since buyers have more options on their hands. The shift of power to the buyers means that they can dictate the price, resulting in lower prices.
BRRRR Method
This refers to buying, rehabbing, renting, refinancing, and repeating. The strategy is used mostly by real estate players who lack initial equity to build a significant portfolio. They would purchase low-performing assets, give them a significant facelift, and put them on the market to earn above-market returns. This method would be repeated several times, often with resounding success.
Airbnb Arbitrage
Who told you that you have to own real estate to take advantage of the short-term rental market? Make use of the Airbnb Arbitrate strategy. In this tactic, you will lease a property long-term from the landlord and then sub-let it as a short-term option. You must perform critical analysis of the market and also on potential costs before pricing your daily rate.
Conclusion
Why are these real estate keywords important? From time to time, you will find yourself chatting with other investors in the market about potential markets or collaborating with them to boost your chances of acquiring a certain portfolio.
In addition, you will be handling significant financial transactions that will determine your income ratio, expenses, and ROI. Knowledge of these terms is crucial to your success as a real estate investor.
Are you feeling overwhelmed with all this property information? You are not the only one. Most landlords and investors choose to outsource a local company that can run and handle the property management needs on their behalf.
For those looking to invest in Asheville, North Carolina, the company to rely on is House in Order Property Management. Our company has years of industry experience, seeing to the needs of a wide range of clientele. Get in touch with us today and you will receive a favorable quote outlining our affordable pricing.
