Real Estate Elevated: 10 Terms Every Real Estate Investor Should Know

If you want to be successful in any business or profession you’ll want to learn the tricks of the trade, which always includes learning new lingo. As Tarek and I found out when we became realtors, there are quite a few terms unique to real estate that we had to know. And while you may not necessarily have the desire to become a realtor, these words are equally important for investors to learn.

As you will find out early on, the world of real estate investing can be pretty confusing if you don’t understand what people are talking about. You’d be surprised at how many times beginning investors lose deals, as they aren’t aware of the terms that will help them achieve success.

Although these words might sound like a new language to you, I’ve outlined everything you need to know so you don’t have to worry. Plus, if you take the extra time to learn what they mean, you’ll be that much more on top of your game.

1. Equity

Equity is an important part of real estate as it refers to how much of a property is actually owned by the homeowner instead of the bank. Equity is determined by removing all liens, loans or mortgages from the property value. To break things down, if a home is worth $150,000 and the home owner owes $50,000 on their mortgage, then they have $100,000 of equity.

2. Carrying Costs

One term that you might not be familiar with, but that you need to keep in mind is carrying costs. This is a term that refers to the mortgage payments, property taxes, insurance, utilities, etc. Carrying costs are basically the costs attached to owning a property, which you’ll need to pay over the extent of the rehab period.

3. MLS

I’m sure you’ve heard me throw this word around many times, but just in case you aren’t sure what it is the MLS or Multiple Listing Service is resource for real estate agents to find new listings. Any property that is listed by a real estate agent can be found on the MLS. Bank owned property, short sales and foreclosures are also included in the MLS.

4. Exit Strategy

Before you even think about buying a property, you need to have an exit strategy set in place. An exit strategy is essentially what you plan to do with the property once you buy it. Real estate investors who’ve flipped quite a few houses usually have a backup exit strategy in place, just in case things don’t go as planned. An exit strategy will give you peace of mind, as you’ll know how to reach your end goal before you get started.

5. Short Sale

A short sale happens when a property sells for less than what is owed to the lender. Lenders have to agree with the sale and have to give permission to release the lien, even though the amount from the sale falls short. Short sale properties can be great deals for real estate investors, although there are a couple of things you’ll want to keep in mind. 

6. Appraisal

It’s easy to mix up an appraisal with an inspection, but the two are pretty different. The inspection is done for the buyer’s benefit as it will bring to light any problems with the property. Whereas an appraisal is completed by the bank to estimate the home’s true value, which in turn will determine the correct amount for the mortgage.

7. Amortization

With a mortgage, you aren’t going to pay the same amount of money each month. Mortgages are amortized, which is basically the reduction of your debt with regular payments of interest and principal, or the way your mortgage payments are distributed each month. A mortgage amortization calculator might help you to better understand this. 

8. Escrow

Escrow has several meanings in real estate, but essentially it is when a third party holds onto something of value (money) during the transaction. When you make an offer, earnest money will be put in “escrow”, lenders also use an escrow account to make sure taxes and insurance are paid on time.

9. Capital Gains Taxes

When you sell a property for more than what you paid for it and you make a “profit” (capital gains) off of it, then you pay capital gains taxes on it. Capital gains taxes are usually around 15 percent. To figure out capital gain, you subtract the price that you originally paid for the property from the price you sell it for.

10. Closing Costs

After everything is said and done, there are going to be a variety of extra costs (known as closing costs) associated with the purchase/sale of a property. The buyer or the seller usually pays the closings costs which are fees paid the lender, attorney, realtor, etc. Closing costs are also used to prepay property taxes and insurance.

Of course, there are plenty of more terms that you can learn, but I feel like this covers the basics that you should know. I know some of these words sound intimidating, but they will become easier to understand over time.