Part of becoming rent-ready is understanding the real estate industry and, just like any other industry, real estate has its own jargon and terminology. This may seem like a barrier between new investors and their peers. But in reality, they are simple terms that just need a little understanding. But in this understanding, you will find you can communicate easily and more confidently with your peers.
This is the exact reason why we at Taylor Street Property Management have put together the following list of important real estate terms that you should understand.
Rental Property
This is a type of property that serves as a source of income for its owners. A rental property is leased out to tenants who then commit to a written agreement with certain conditions – including paying rent.
This kind of property tends to come in two forms based on their use. Those being residential or properties where people live, and commercial properties where people conduct business.
Equity
This is the difference between a property’s present market value and the amount the owner owes in the property’s mortgage. As the mortgage balance reduces and property market value grows, the equity value builds up over time.
Rental Income
After an investor leases out a property to tenants, they agree in writing the amount of money to be paid on specified dates as specified by the rental agreement. This payment is referred to as rental income.
Cash Flow
This is the net value of money the property owner pockets after each month from their investment. After revenue is generated, deductions such as loan repayments and operating expenses are made, and the balance is what is referred to as cash flow.
Cash flow can be either positive or negative depending on the total deductions made. During months when the investor spends less than what is earned, the cash flow is marked positive while during months where expenses supersede inflows, the cash flow is marked negative.
Appreciation
Appreciation is a real estate term that defines an increase in a property’s value over time attributed to a variety of factors including declined supply, increased demand for property, inflation, and a rise in bank interest rates. This translates to properties becoming more expensive in the market.
Return on Investment
This is the term used to define the profit an investor can expect to make from a venture. This can be a piece of property or other assets. ROI indicates the viability of an investment. A high ROI is enticing for investors and can be used as a measure of evaluating different investments.
Net Operating Income (NOI)
This is the income balance that is left with the investor after their property expenses have been deducted from the revenue generated in that time period, often monthly. These expenses include taxes, management fees, marketing and property utilities. After their deductions, the balance is what is referred to as the NOI.
Cap Rate
This is the ratio of NOI from an investment property to its capital cost or current market value. It generally refers to the rate of return expected from the property.
Credit Score
This is a numerical value derived from historical data and financial characteristics that represents the creditworthiness of an individual.
This information is critical and necessary for Real Estate investors as it determines their viability for a loan, and what interest rate will be charged. A high credit score assures an investor of their viability for a loan or mortgage.
Internal Rate of Return
The internal rate of return (IRR) is information used by financial analysts to judge the profitability of an investment.
Generally speaking, the higher the internal rate of return, the better the investment is said to be.
Property Management
Real Estate investors should be aware of the ins and outs of property management. It is the practice of overseeing the operations on a rental property including screening tenants, selecting ideal tenants, collecting rent and deposits, maintaining and servicing the property, and managing the property’s financial information.
Tenant Screening
A tenant screening process involves taking prospect tenants through specific tests and questions to ascertain whether or not they are suitable to live in your property.
Generally, this involves having the prospect fill out an application form and go through historical rental and employment checks among other things.
Capital Gains Taxes (CGT)
Capital Gains Tax is defined as the tax charged on income generated from property transfer or sale from one person to another. Capital Gains Tax is payable to tax authorities and is usually charged as a percentage of the profit made by the initial property owner.
Bottom Line
By understanding the above terms, you will put yourself in good stead with your property-owning peers. But there are many more terms and situations will want to learn about to become a successful landlord.
The property managers at Taylor Street Property Management would love to partner with you and help you take your investment to the next level, contact us today for more information!
Serving the areas of Phoenix, Scottsdale, Paradise Valley, Gilbert, Chandler, Mesa, and Tempe, Taylor Street Property Management Company is dedicated to offering stellar Real Estate services. These include property advertising, tenant screening, property maintenance, and financial reporting.
Get in touch for a free rental analysis!
