Landlordology- Basic Real Estate Investing Terms to Know — FIbyREI

Landlordology: 45 terms you need to know

If you want to succeed at real estate investing, it can be helpful to understand landlordology. Here are the terms you need to know.

Net operating income

Net operating income is often referred to as NOI. The NOI is the total revenue of a property minus any required operating expenses.

1031 Exchange

Section 1031 of the IRS tax code allows a property owner to defer capital gains taxes in order to exchange certain types of property. Essentially, you can delay your taxes on the income from the sale of one property if you are putting that money towards the purchase of another similar property.

Gross rental yield

As you explore potential properties, gross rental yield can help evaluate the return on investment. You can find the gross rental yield by dividing the total income generated by the property in a year by the price of the property plus closing costs.

Appreciation

Appreciation is a term to describe the rise in a property’s value over time.

Adjustable-Rate Mortgage (ARM)

An adjustable-rate mortgage is a type of mortgage with an interest rate that can change over time. In most cases, the interest rate is set for a few years but then changes at regular intervals. With that, your mortgage payment could increase or decrease based on the current market conditions.

Fixed-rate mortgage

A fixed-rate mortgage has an interest rate that is set for the duration of your loan term. With that, the monthly mortgage payment will never change. A fixed-rate mortgage can be a good idea for investors that want a reliable number to budget around.

Turnkey Property

A turnkey property is move-in ready when you purchase the property. In this case, you should be able to take the keys and move-in to find tenants immediately. In contrast, homes that are not turnkey could take weeks or months of intensive renovations.

Capital gains tax

Capital gains tax is based on the capital gain or loss when you sell the property. If the property sells for more than you bought it for, the difference in price is considered a capital gain. However, if the property sells for less than you bought it for, then the difference in price is considered a capital loss.

Debt-to-equity ratio

If you took out a mortgage to finance the property, the debt-to-equity ratio can help you determine how much of the property you actually own vs how much you owe. You can determine the debt-to-income ratio by comparing the outstanding debt to the equity you’ve built in the property.

Debt-to-income ratio

If you are looking to qualify for a mortgage, a lender will look at your debt-to-income ratio. A high debt-to-income ratio will indicate a higher risk to the lender. With that, a high debt-to-income ratio can lead to less favorable loan terms.

Closing costs

When you purchase a property, there are a variety of fees that are collectively referred to as closing costs. Both the buyer and seller may have closing costs. In general, you should estimate spending between 2 to 5% of the purchase price in closing costs. With that, it is an important expense to budget for.

Inspection contingency

When you make an offer on a house, you can include an inspection contingency. If the property doesn’t meet your reasonable expectations, you could back out of the offer or negotiate a new purchase price with minimal hardship.

CMA (Comparative Market Analysis)

A CMA, or comparative market analysis, can help you understand the broad picture of current market trends. Typically, these reports are generated through an MLS, which means that off-market deals will be missing. But overall, it is a good way to gather information in order to determine a fair market value for their home.

NAR (National Association of Realtors)

The National Association of Realtors has over 1 million members working in residential and commercial real estate industries. There are high ethical standards to maintain within the NAR. This professional affiliation can help you find a good realtor.

FMV (fair market value)

The fair market value (FMV) of a property is a reasonable price that is fair to both the buyer and seller based on current market conditions. As a buyer or seller, it is important to do your research to determine the FMV of any properties you are interested in.

LTV (loan to value ratio)

The LTV, or loan-to-value ratio, is a percentage that measures the total debt on a property in comparison to the market value of a property. Generally, lenders will not want to commit to a property with an LTV higher than 80%.

Gross rental income

Gross rental income is the amount that the property owner collects in rent and additional fees. Anything refundable, such as a security deposit, is not considered a part of gross rental income.

Single-family home

A single-family home, or SFH, is a standalone house that doesn’t share walls with any other properties.

Multi-family home

A multi-family home, or MFH, is a building with multiple separate units inside. For example, a duplex or triplex would be considered a multi-family home.

Gross rent multiplier

The gross rent multiplier can help you evaluate the investment potential of a property by comparing the gross annual rent with the fair market value.

REO (Real Estate Owned)

REO, or real estate owned, is property owned by the bank or lender that hasn’t been sold after a foreclosure.

Property manager

A property manager can help a property owner run the day to day of a property.

Rental property

A rental property is one that is being leased to a tenant.

House hacking

House hacking is a lifestyle strategy with the goal of eliminating your housing expense. Find out how to house hack in our ultimate guide .

Short-term rental

A short-term rental is one in which the tenants are there for a few days or months. For example, an Airbnb or VRBO rental would fall into the short-term category.

Long-term rental

A long-term rental is one in which the tenants are there for a longer period of several months or a year.

Seller’s Market

A seller’s market is highly competitive for buyers. Typically, houses are in high demand with high prices and bidding wars.

Buyer’s Market

A buyer’s market is less competitive, with more choices available at better price points for buyers. Sellers will not have the advantage in this case.

Pre-approval letter

A pre-approval letter is given to you by a lender to confirm what you can afford. This letter can provide peace of mind for sellers.

Hard money loan

A hard money loan is issued by private investors or organizations based on the assets of the borrower. Although the interest rates can be higher, they are often more quickly funded.

Credit score

A credit score is a three-digit number that offers lenders an idea about your creditworthiness. Depending on your credit score, you might face challenges receiving a loan.

Real estate agent

A real estate agent has a license that allows them to represent you in a real estate transaction. A real estate agent often works under a real estate broker.

Real estate broker

A real estate broker is a professional that can represent buyers and sellers in real estate transactions. However, they are able to work independently.

Rehabilitation

Rehabilitation cost is the price you pay to make repairs or update the property. Generally, this will lead to an increase in the total value of the property.

Bottom line

Now that you know more about the landlordology of real estate investment, you’ll feel more comfortable wading through the jargon.

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Host of “The House Hacking Podcast” and owner of www.FIbyREI.com

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Andrew Kerr

Andrew Kerr

Host of “The House Hacking Podcast” and owner of www.FIbyREI.com