Glossary of Common Real Estate Terms
If it sometimes seems like real estate professionals have their own private lexicon, you’re correct. There is a whole bank of terminology in the real estate industry that professionals use to communicate value, property details and processes. These terms help real estate professionals do their jobs more efficiently, but they can be confusing for the beginning investor who’s trying to understand the world of real estate. If you’ve wondered what the heck words like cap rate, ROI and SFH mean, then you’ve come to the right place. Here is your glossary of commonly used real estate terms.
An appraisal is an assessment of the fair market value of a property. Appraisals are conducted by professional third parties at the behest of the lender. Neither sellers nor buyers can request certain appraisers to be used, or control their findings.
The assessed value is the value placed on a property by the city or town. Property and the land it sits on are usually assessed separately. The local government uses the assessed value to calculate the property taxes for the owner. The assessed value can change over time, which is why assessments are repeated every few years.
Cap rate is short for capitalization rate. It’s used by real estate investors to determine the potential rate of return on a property if it were bought with all cash.
Net Cash Flow
Cash flow is the monthly net profit generated by an investment property after all the monthly expenses have been paid.
The cash-on-cash return is the annualized return that an investment will generate when taking into account financing. For example Net Cash Flow Per Year / (Down payment + Renovations Costs) = Cash-on-Cash Return %.
Comps is short for comparables. To gauge a fair market price for your property, you will “pull comps.” This means you will do research to see what similar homes in your area have recently sold for. If you have an agent do this for you, they will give you what is called a CMA, which stands for Comparative Market Analysis, which is simply a written report on the comps in the area. Comps are going to be very important whether you’re doing a rental property or a flip, so learn how to find good comps.
HOA stands for Home Owners Association. An HOA is a private governing body in a community that upholds neighborhood covenants; ostensibly to ensure an attractive, safe community where everyone abides by the same uniform standards. HOAs typically charge a monthly fee that community owners are obliged to pay in addition to top of rent or mortgage payments. The HOA fee is non-negotiable and perpetual.
The inspection report is done by a third party to determine if there are any safety issues with the property. Inspection reports can be ordered by the lender, by the buyer, the seller or their assigns, at any time. These reports can be as short as one page, but most often they run several pages long. They cover everything from minute details like the presence of non-GFCI outlets near the kitchen sink to plantings located too near the perimeter of the property’s foundation wall. Inspection report findings are often used by buyers as leverage to negotiate a lower selling price.
MLS is an acronym for Multiple Listing Service. The MLS is a paid subscription-based service that’s exclusive to real estate agents and other real estate professionals. When you contract with a real estate agent, they list your home on the MLS so the property details can be seen by other agents and brokers.
PMI is an acronym for private mortgage insurance. But it’s not insurance for you; it’s insurance for your lender in the event that you default on the loan. You have to pay PMI in certain cases, including if you put less than 20 percent down on your home purchase. Usually–but not always–you can drop the PMI insurance when your equity stake reaches 20%.
Realtor® is a professional designation of membership in the National Association of Realtors®. Every Realtor®is a real estate agent, but not every real estate agent is a Realtor®.
ROI stands for Return on Investment. It is calculated very similarly to cash on cash return. The formula would be Profit / Cash Invested = ROI. ROI does not take into account time, so normally ROI percentages are very high. For example, if you invest $50,000 into a property and you flip that house and make $25,000 profit then your ROI would be $25,000/50,000 which is 50%. But this doesn’t take into account that it may have taken you 2 years to make that return!
SFH and MFH
SFH stands for single-family home and MFH stands for multi-family home.
There are hundreds of terms used in real estate dealings that you may not be familiar with. This list represents only a small percentage, but these are the most common ones that you’ll hear as you move along your real estate investment journey. If you have any questions about what terms mean, or you want to better understand how a turnkey rental property investment works, please feel free to contact us or to leave a comment below. We’re always happy to help.