5 Real Estate Financial Terms To Know

5 Real Estate Financial Terms To Know
  • Opening Intro -

    Seasoned real estate investors and property buyers know that there is a great deal of terminology to take in when seeking a full understanding of the business.

    Knowing the correct terminology and their precise meanings is a crucial first step in becoming a seasoned investor.

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These are the foundation and first building blocks of your understanding. The five words included here are fundamental to a working knowledge of real estate finances.

Cash Flow

In real estate, the term cash flow refers to the difference that exists between the income of a property and its expenses, including its debts. Rental real estate is one example of a situation that uses cash flow; examples include single-family rentals, duplexes, commercial buildings, and apartment complexes.

Cash flow would be the proceeds from rent payments, but expenses of operation are taken out of them. In fact, at its most basic, the definition of cash flow could be expressed as the operating expenses subtracted from gross income.

It is the amount of money that goes into and then out of the business in question. Cash flow is important because it creates safety and opportunity. Profits can create a cushion against future expenses as well as create the circumstances permitting you to reinvest.

Gross Yield

An investment’s gross yield is the amount of its profit before deducting expenses and taxes. It is expressed using terms of percentages and calculated as an annual return on the investment in question before expenses and taxes and divided by the investment’s current price.

Gross yield is used not alone for real estate, but also mutual funds and fixed-income investments.

But in the case of rental property investments, the differences that exist between net and gross yields can turn out to be significant.

This is because income can be eroded substantially by such operating expenses as insurance, maintenance expenditures, and property taxes.

Appreciation and Depreciation

Inflation, property improvements and increasing demand may all lead to an increase in the value of a property: this is known as appreciation. When the value of a property decreases due to lower demand, deterioration, economical deflation, or other undesirable influences, it is known as depreciation.

When seeking a house, examining the increase or decrease of a property’s value is imperative; in fact, it is a fundamental element of real estate. Do not consider this element of valuation without bringing other elements of the equation into play.

You need more data points to make a decision; basing investment decisions on an appreciation that might take place is speculative, involving a higher amount of risk than an investment based on in-place income.

Amortization

According to Homeway Real Estate, which has Lehigh Valley homes for sale, and a helpful financial terms glossary, amortization is The repayment of a mortgage loan by installments with regular payments to cover the principal and interest.

This mathematical process dictates the amount of a homeowner’s mortgage payment each month applies to the interest and how much of it applies to the loan’s principal.

Quite simply, it is the schedule of a home buyer’s mortgage loan payments each month. Amortization is a means of paying off debt using equal installments; these include amounts of interest and principal payments that vary from case to case.

When a homeowner is paying a loan off within the agreed schedule, it is known as an amortized or amortizing loan.

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Double Close

Before they sign on new properties, wholesale homebuyers frequently have an existing exit strategy. A double closing in this instance permits the wholesaler to buy a property and, in the same transaction, sell it to their new buyer.

Sometimes this occurrence is known as a back-to-back closing. Investors may prefer a double close to keep low-key about their capital gains. This conceals it from both seller and buyer.

The key to remember is that the double close is two distinct transactions. One exists between wholesaler and seller, the other between the end buyer and the wholesaler.

With these five terms, you are ready to build a foundational knowledge of real estate investments. Wherever you are buying a home, you need to know the right words and understand what they mean when you encounter them in business transactions.

These are only the beginning, however. A vast wealth of information awaits you to become well-versed as a real estate investor. Learn these five terms to establish yourself with a solid beginning.

Image Credit: real estate financial terms by envato.com

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