The world of real estate can be vast and complicated, especially when you haven’t studied the most important terms that every real estate investor should know.
Before you begin looking on Zillow or talking to a realtor about purchasing a rental property in Murrieta, CA, it’s crucial that you learn to speak the lingo of real estate investors.
To help you take your first step to becoming a successful real estate investor, or if you simply want to brush up on your knowledge, we’ve put together a brief glossary of important real estate terms you should know.
Real Estate Investor Terms
If you’ve sat in a room with experienced real estate investors, it may have sounded as if they were speaking another language when divulging information about their investments or making predictions about the market.
Learning the terms below can help you jump into these conversations while also assisting you with planning your own real estate investment’s success.
Over time, the value of a property can increase. This is known as appreciation.
For example, if you purchased a property for $250,000 in 2011 and sold it for $400,000 in 2023, it has appreciated. This could be due to the area becoming more developed, school systems ranking higher, or increased job opportunities in the area.
Every real estate investor wants their investment properties to appreciate so they can make a return on their investment when they decide to sell.
The cap rate is a measure of how much income a property is producing or could produce. When searching for a property to purchase, it’s important to calculate the cap rate to see how much you could potentially profit from it.
To calculate the cap rate, divide the property’s value or purchase price by the net operating income.
Cash flow can be positive or negative. When you generate positive cash flow, it means the rental property is making a profit after deducting expenses. If you have negative cash flow, you are losing money.
Debt to Income Ratio (DTI)
The debt-to-income (DTI) ratio is a measure comparing your monthly debt payments to your monthly gross income. It’s used by lenders to assess your ability to manage monthly payments and repay borrowed money.
A lower DTI ratio is better, indicating you’re not overly burdened by debt.
Equity is the percentage a homeowner owns of their property. If you purchase a property in cash, then you’ll have 100% equity. However, if you have a mortgage, you’ll own a percentage of the property while the bank owns the rest.
As you pay off the mortgage, your equity will increase.
Fair Housing Act
The Fair Housing Act of 1968 prohibits discrimination against six protected classes, including disability, gender, race or color, religion, familial status, or national origin.
If investing in a rental property, it’s crucial to be aware of these regulations. The violation fines can be up to $10,000 and potential jail time.
Gross Rent Multiplier
The gross rent multiplier will determine how many years it will take for the property to pay for itself through rental income. To calculate the GRM, divide the property’s purchase price by the gross monthly rent income.
Gross Rental Income
The gross rental income is the total income you receive each month without deducting expenses. These fees can include rent, parking fees, pet fees, and utilities.
An inspection contingency in real estate is a clause in an agreement of sale allowing the buyer to inspect the property within a set period.
If significant issues are found, the buyer can renegotiate or withdraw from the sale without penalty. It’s always a good idea to get a home inspection when purchasing a property to avoid expensive unexpected repairs down the line.
Internal Rate of Return (IRR)
Internal Rate of Return (IRR) is a percentage that tells you how much money you can expect to make each year from that investment.
If you buy a building and rent it out, the IRR would include how much you make from rent and how much the building’s value goes up compared to how much money you originally spent on it. A higher IRR means the investment is doing well.
Loan-to-Value Ratio (LTV)
The loan-to-value ratio (LTV) determines how much a lender is giving you to purchase a property. To decrease the LTV, you must increase your down payment.
If the LTV is high, you may need to purchase private mortgage insurance (PMI) until the LTV decreases to a certain amount as you pay off the loan.
Net Operating Income (NOI)
The net operating income is how much you profit each month after deducting expenses and operating costs. To calculate, subtract the operating costs from the gross rental income.
A property manager is someone who professionally manages and maintains your rental property for a monthly fee.
They are responsible for acquiring tenants, coordinating maintenance and repairs, conducting accounting reports and taxes, and acting as a liaison between the landlord and tenants.
A turnkey property is a ready-to-rent property. There are no improvements that need to be made, and sometimes, they already have tenants leasing the property.
This is a great opportunity for beginner landlords and real estate investors who want to start generating income immediately after closing.
Maximize Your Rental Income with Scout Property Management
As a new real estate investor, you’re stepping into a world of complicated equations, regulations, and problem-solving. The good news is that you don’t have to do it alone.
Scout Property Management is here to make renting and maintaining your rental property in Murrieta, California, easy and profitable.
You’ve done the hard work of finding the perfect rental property; now it’s time to sit back and enjoy passive rental income.
The rental property professionals at Scout Property Management are experienced in tenant relations, rent collection, repair coordination, data analytics to maximize your ROI, and transparent financial reporting.
Are you ready to put your rental property in good hands? Request a free rental analysis from Scout Property Management today!