Must Know Real Estate Investing Terms

Beginner real estate investors face a steep learning curve. We’ve put together a glossary of common real estate investing terms in hopes of answering some of the most common questions we receive regularly. We’ve included explanations for a few of the main formulas, but we have a special post coming out in a couple weeks to deal specifically with all the formulas you will need when analyzing real estate deals so check back for that.

Purchasing:

Amortization Period

A table which shows how much of each payment will be applied toward principal and how much toward interest over the life of the loan. It also shows the gradual decrease of the loan balance until it reaches zero.

Appraiser

An individual qualified by education, training, and experience to estimate the value of real property and personal property. Although some appraisers work directly for mortgage lenders, most are independent.

Appraised Value

An estimate of property value written by a qualified individual. Appraisals performed for mortgage lending purposes may not reflect the market value of the property or the purchase price.

Closing Costs

Costs in addition to the purchase price of the home such as legal fees, transfer fees and disbursements that are payable on the closing date; they typically range from 1.5-4 percent of a home’s selling price.

CMHC (Canada Mortgage and Housing Corporation)

A Canadian Crown Corporation that administers the National Housing Act. CMHC services include insuring high-ratio mortgage loans for lenders.

Collateral

In a home loan, the property is the collateral. The borrower risks losing the property it the loan is not repaid according to the terms of the mortgage or deed of trust.

Comps (comparables)

A listing of comparable properties used to value a similar property.

Days on Market (DOM)

Pretty self-explanatory, DOM is the number of days that the property has been listed for. This is helpful to know during negotiations as properties that sit on the market for a long time are often good candidates for lower offers.

Down Payment

The initial amount of cash you put down on a property if you are using a loan to purchase it; it usually ranges from 5 to 25 percent of the purchase price.

Disbursements

Are costs that are paid out-of-pocket by your notary public or lawyer on your behalf in connection with your real estate transaction.  Disbursements usually include the cost of land title and tax searches, land title registration fees, digital execution fees, agent’s fees, courier, postage, copies and other miscellaneous office expenses.

Foreclosure

Remedial court action taken by a mortgagee when default occurs on a mortgage.

Home Owner Association (HOA)/Strata Fee

A homeowner’s association (HOA) is an organization in a subdivision, planned community or condominium that makes and enforces rules for the properties within its jurisdiction. Those who purchase property within an HOA’s jurisdiction automatically become members and are required to pay dues, known as HOA fees.

Land transfer tax

A fee paid to the government for the transferring of property from seller to buyer.

Lien

A legal claim against a property that must be paid off when the property is sold. A mortgage or first trust deed is considered a lien.

Liquid (Asset)

A cash asset or an asset that is easily converted into cash.

Investing:

Appreciation

The increase in the value of a property due to changes in market conditions, inflation, or other causes. Referring mainly to an increase in equity ie: house is now worth more than before simply because the market has increased in value.

Blanket Mortgage

A single registered document that encumbers more than one property.

Cash Flow

Refers to the monthly money generated from the investment. This is determined after all monthly expenses such as land tax, utilities, mortgage payments and any other expense on the properties have been subtracted from the total rental income.

Capital Expenditures

The cost to replace big items on your rental property such as the roof, appliances, hot water tanks, furnace, ac units, windows, etc.

Capitalization Rate

Capitalization rate, commonly known as cap rate, is a rate that helps in evaluating a real estate investment. Cap rate = Net operating income / Current market value (Sales price) of the asset. Capitalization rate shows the potential rate of return on the real estate investment.

Construction Advance

Money advanced to the borrower under a construction loan.

Equity

The value of real estate over and above the mortgage against it.

Leverage

Is the use of various financial instruments or borrowed capital to purchase and/or increase the potential return of investment.

Liability Insurance

Insurance coverage that offers protection against claims alleging that a property owner’s negligence or inappropriate action resulted in bodily injury or property damage to another party. It is usually part of a homeowner’s insurance policy.

Maintenance/Repairs

The monthly cost to keep your rental property in normal living condition for your tenants (usually set at 6%).

Net operating income (NOI)

Is simply the annual income generated by an income-producing property after taking into account all income collected from operations, and deducting all expenses incurred from operations.

Principal pay down/principal recapture

The equity you gain as you pay down your loan.

Property management

Property management is the operation, control, and oversight of real estate management indicates a need to be cared for, monitored and accountability given for its useful life and condition. For example, an owner of a single family residence may engage the services of a property management company.

Vacancy provision

The amount of money that you put aside each month to pay for your rental expenses to cover when a unit is vacant (usually set between 6-10%).

Types of Properties:

Single family residence (SFR)

Is the most common type of home listed in the MLS. Also known as single family detached, this means the home is a stand-alone structure with its own lot intended for one family.

Multifamily residential (also known as multi dwelling unit or MDU)

Is a classification of housing where multiple separate housing units for residential inhabitants are contained within one building or several buildings within one complex. A common form is an apartment building.

Duplex

A residential property with two separate units.  Also referred to as a 2-door property.

Triplex

A residential property with three separate units. Also referred to as a 3-door property.

Quadplex (4plex)

A residential property with four separate units.  Also referred to as 4-door property.

Commercial

Commercial real estate is any non-residential property used for commercial profit-making purposes. Any property with over 5 units within the same house/building in Ontario is considered a Commercial property. Commercial real estate also includes apartment buildings, stores, malls, office buildings, and industrial parks.

Turnkey property

Is a fully renovated home or apartment building that an investor can purchase and immediately rent out. Some firms that sell turnkey properties may also offer property management services to buyers, minimizing the amount of time and effort they have to put into the rental.

Buy and hold

Buy-and-hold real estate investing is the purchase of rental property with the intention of holding it for a long period.

B.R.R.R.R.

Is an acronym for: B – buy R – rehabilitate  R – rent R – refinance  R – repeat.  This is an investment strategy used by many investors looking to build their portfolios with rental properties.  The idea is to inject immediate equity by purchasing older houses in need of renovations and updating the unit. The goal of which is to get a higher appraisal that you can then borrow money against to capture the equity growth to buy another house and so on.

Michael Murphy, Ottawa Realtor

Hi, I'm Michael

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