Beginner Investors: Do You Know These 5 Terms?

Are you just starting out?

Real Estate investing for beginners can be tricky and it’s easy to get lost in the terminology. Here are five key real estate terms you must know as you purchase your rental property.

Amortization

This is the decrease of your property's debt. In the beginning of your mortgage, you are paying heavy interest while at the end the majority of the mortgage is going towards the principal. A amortization calculator is helpful to look at when purchasing your property. If you are getting a fixed rate mortgage, the rate does not change for the life of the loan.

Equity

To find this, take the value and subtract your debt. For example, you purchase a property at 300k with a FHA loan. Your down payment is 3.5% or 10,500. Assuming you purchase at market value, you have 3.5% equity in the property. Over time, you are paying down the principal, which is building you equity. An amortization table will show you how much of the principal you are paying down on a monthly and yearly basis.

Cash Flow

This is the money left over after you paid all your expenses. This is a key term when evaluating a property. For example, if you have a 3 unit building that rents out for 1k per unit. You have 3k per month as income. You use this 3k to pay the principal, interest, taxes, insurance of 2100 a month. You have 900 left to pay water/sewer/repairs and other expenses. The remainder after you pay your monthly expenses is your cash flow.

Return on Investment (ROI)

This is a measure of performance. It can be used to compare different investment options and useful when evaluating multiple deals. For example, if an index fund gives you a return of 7% and a property shows a projected return of 9%, the property is providing me with a better return on the money invested. The higher the ROI, the better the deal.

Appreciation

Properties tend to increase value over time. This is the opposite of depreciation when it decreases in value. For a buy a hold investor, typically the longer the asset is held, the higher the value. The goal is for the asset to gain value over time when you are ready to sell. Real Estate is also very competitive over inflation. Inflation is around 2-3% percent a year and being conservative, real estate should increase 2% In value per year.

With a knowledge of these terms, it should be much easier to analyze deals and not get lost in the terminology.