Terms All Real Estate Investors Should Know

Are you looking to invest in real estate and want to familiarize yourself with important terms? You have come to the right place!

Investing in real estate is a great way to grow your success over time and ensure a comfortable retirement. However, investing in real estate is not as simple as some may assume.

To ensure a profitable venture, investors must have basic knowledge of the real estate market, current market trends, and an understanding of legal and financial terms.

To help you navigate the intricate world of real estate, the experts at Redsail Property Management have written this guide. Keep reading to discover the key terms every real estate investor should know!

9 Real Estate Investing Terms To Know

Appreciation

Understanding the concept of appreciation is crucial for real estate investors. This term refers to the steady increase of a property’s value over time.

Typically, properties appreciate due to factors such as market demand, inflation, economic conditions, rising interest rates, or improvements to the property or surrounding area.

As an investor, you should choose properties in areas with high growth potential to maximize the appreciation potential.

Capitalization Rate

Also known as cap rate, this allows investors to determine the potential rate of return of a real estate investment property.

It’s calculated by dividing the property’s net operating income (NOI) by its current market value or purchase price.

For instance, if a property has generated $30,000 in NOI and is valued at $300,000, the cap rate would be 10%.

Typically, a higher cap rate indicates a higher risk and potentially higher return, while a lower cap rate suggests a lower risk and return.

Knowing how to calculate the capitalization rate is essential for evaluating the risk-reward profile of different investment properties and making informed decisions.

Cash on Cash Return

Cash on Cash Return (CoC) measures the annual return an investor gets, compared to the actual amount of cash they invested in a property.

This is calculated by dividing the annual pre-tax revenue by the total amount invested. For instance, if an investor puts down $50,000 in a property and receives $5,000 in annual rental income, the CoC return would be 10%.

Typically, a higher CoC return indicates a more efficient use of invested capital.

Due Diligence

Due diligence is a necessary step in the investment process. This term refers to the comprehensive assessment of a property before finalizing a transaction.

Due diligence typically involves reviewing financial records and other important documents, inspecting the property’s physical condition, verifying legal compliance, and assessing potential risks.

This process is important for making informed investment decisions, as it can uncover hidden issues such as environmental hazards, structural problems, zoning restrictions, and major repairs.

Gross Rental Yield

If you’re thinking about investing, you should know how to calculate an investment’s gross rental yield.

This is used by real estate investors to calculate the annual income generated from a rental property. It’s typically expressed as a percentage of the property’s original purchase price.

To calculate the gross rental yield, you must divide the annual rental income generated by the property's purchase price and multiply by 100.

For example, if your rental property costs $200,000 and generates $20,000 in annual rental income, the gross rental yield would be 10%.

Typically, a higher gross rental yield indicates a more successful investment. However, it’s important to note that this calculation does not account for operational expenses or taxes.

Holdover Tenant

A holdover tenant is a renter who remains in a property after their lease has expired.

Holdover tenancies exist in a gray legal area between a rental agreement and trespassing.

Investors must understand their rights and the appropriate legal actions in their jurisdiction when dealing with holdover tenants to avoid potential legal complications.

Handling holdover tenants effectively helps maintain property profitability and tenant relationships.

Lease Agreement

A lease agreement is a legally binding contract between a landlord and a tenant.

It’s used to outline the terms and conditions of renting a property, including details such as the duration of the lease, price of rent, payment due dates, maintenance responsibilities, and rules for property use.

Investors who rent out properties need well-drafted lease agreements to protect their interests and ensure compliance with local rental laws.

Net Rental Yield

Net rental yield is used to measure a property's profitability more effectively. This provides a clearer picture of the property's actual return on investment.

It allows investors to make more informed decisions by understanding the net profitability after all necessary costs are covered.

It’s calculated by subtracting annual expenses (such as property management fees, maintenance, insurance, and property taxes) from the annual rental income, dividing the result by the property’s purchase price, and then multiplying by 100.

For example, if a property’s gross annual rental income is $20,000, but annual expenses total $5,000, the net income would be $15,000. If the property was purchased for $200,000, the net rental yield would be 7.5%.

Return on Investment (ROI)

One of the best ways to measure the profitability of a real estate investment is ROI. It allows investors to determine their gains or losses relative to the initial investment they made.

To calculate ROI, you must subtract the initial investment cost from the final value of the investment, divide the result by the initial investment cost, and multiply by 100.

For example, if you purchased a property for $200,000 and it’s valued at $250,000 today, after making $20,000 in improvements, the ROI would be 15% ( [$250,000 - $200,000 - $20,000] / $200,000 * 100).

Bottom Line

Whether you’re a beginner investor or a seasoned investor, it’s never too late to learn more about the realm of real estate.

Familiarizing yourself with key financial and legal terms, such as the ones discussed above, will help you ensure the success of your future investments.

Have any more questions about these real estate terms? Contact Redsail Property Management! Our team will be happy to help you navigate the complexities of the real estate market.