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The last thing you need as a budding real estate investor is for word to get out that you’re new, you’re green, and that other investors should stay away. That’s a surefire way to dry up any deals in your pipeline and generally make your life a bit more difficult.
If you want to seem like a professional, you need to speak the lingo. So here are 5 phrases that any beginning investor should check out. And if you’re looking for more tips on beginning, make sure to check out this killer guide on how to start investing in real estate.
5 Terms Every New Real Estate Investor Should Know
1. Cash On Cash Return
Cash on cash return is a method of calculating the annual return on investment (ROI) you can expect from a property based on how much cash you put into it. It is determined by dividing the property's annual pre-tax cash flow (income minus expenses) by the amount of cash you put into the property in the first place.
For example, if you invest $150,000 in a property and get $15,000 in cash flow before taxes every year, your cash on cash return is 10% ($15,000/$150,000).
Cash on cash return is important because it lets you compare how profitable different investment opportunities are. It helps you decide if a property is a good investment by giving you a clear picture of how much money you can expect to get back. It's especially useful for evaluating investment properties that need a lot of cash up front, like commercial real estate or properties with multiple units.
2. Equity
Equity is the basis of all value in real estate, so it's really important to understand it well.
Equity is the difference between the market value of your property and how much you still owe on your mortgage. As a homeowner pays off their mortgage, the difference between what they owe and what they can sell the home for grows.
Think of it this way: Equity is how much money you would get if you sold your home right now. So, if you sold the house for $1000 and owed the bank $800, you'd get to keep $200. On the other hand, if you sold the house for $1000 and you only owed the bank $200, you would walk away with $800.
$800 is a higher equity than $200.
"Building equity" is a phrase you'll hear a lot when it comes to real estate investing. When you make improvements to your home, you raise its value. This makes the difference between what the home is worth and how much you still owe on it bigger. In turn, this makes more equity.
3. Appreciation
One of the primary reasons people invest in real estate in the first place is because real estate is what’s known as an “appreciating asset”. It gains value over time, as opposed to a car, which loses value over time.
But heads up - when you talk about real estate investing, make sure you don't mix up appreciation and building equity. Building equity is an active process; remodeling the kitchen or putting on a new roof leads to higher equity. Appreciation is a passive process, you just sit back and let the asset’s value increase over time.
4. Short-Term Vs Long-Term Rentals
People who are new to real estate investing often get "long term" and "short term" rentals confused. This is a dead giveaway that the person is new to investing - so we’re going to make sure you know the difference between the two.
Long Term Property Rentals
Investors who are interested in long-term real estate rentals buy a property with the intention of renting it to tenants who will live there for 6 months or more. Investors generally want to keep these properties for many years, to recoup their investment while letting appreciation work its magic.
Now, whether a property is a long-term or short-term rental depends a lot on where the property is located and what kind of property it is. For instance; you find an affordable single-family home in a suburb near a city that's on the rise. You'll probably want to keep it for a long time. Why?
As a city grows, young families start to move out of the city to find their first home. Even if this small family doesn't have enough money to buy a house right away, many young families don’t want to live in a crowded city with young children. Finding an affordable single-family home in the nearby vicinity of the city is the perfect spot for them to rent.
This puts you in a great position to offer this young family a "stepping stone" home that they can rent for a year while they grow and save up to buy their own home.
When that family leaves, another family moves in, and the process repeats.
Now, "long term" is one of those words in real estate investment that throws people off because they think it means "locked in."
Quite the opposite, in fact. Many investors buy homes in areas that are growing quickly to rent them out for 5 to 10 years while the market grows and the home's value goes up. Then, when the market has matured, they sell at a substantially higher price than they bought at and keep the money they made.
Short Term Property Rentals
One of the most popular real estate investment terms of the last few years is "short term rental", and we saw a HUGE spike in interest during COVID lockdowns.
Short term rentals are properties where people stay for the weekend or maybe even a week. Usually, it's in a busy area like a city center that’s walkable. Or, it’s nestled into the mountains or by a beach. Think, “weekend vacation” or “short business trip” - this is the target market for short term rentals.
But remember - these types of rentals need a lot more maintenance and work to keep them filled. But if you’ve got the time and resources to make them work, they usually bring in more money than long-term rentals.
5. Distressed Seller
Distressed sellers are property owners who are having financial problems or other issues and who need to sell their property quickly. Distressed sellers come on hard times for a variety of reasons; maybe they lost their job, maybe they got a divorce, or maybe they’re simply unable to pay their mortgage. Because of this, they might be willing to sell their property for slightly lower than market value in exchange for fast cash that will help them avoid foreclosure or other financial problems.
For real estate investors, this is a win-win. The investor gets a great deal on the property, and the property owner gets the fast income they need.
But investing in distressed properties can also be risky because they may have hidden problems that need to be fixed before they can be sold again. Before making an offer, go to the property and estimate the home repairs it will need to make it more attractive to potential buyers.
Even experienced real estate investors need to occasionally brush up on their vocabulary. The important thing is that you never stop growing and learning.
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