Real Estate Terms and Meanings That You Need to Know
If you’re planning on entering the real estate or property management industry, there are a variety of terms that you will need to know in order to be successful. This can be an overwhelming experience especially at first as you hear a ton of different terms and acronyms and have no idea what they all mean.
Luckily, in this blog we will be going over the most popular terms used in the property management industry and the meanings behind them. We will also be breaking them down by category so you have some context for the terms as well.
Paying close attention to and learning these terms will help you reduce stress when entering into this industry. You don't want to be the only one in the room who doesn't know what is going on, and this blog will help you to make sure that doesn't happen
Before You Buy
Property Classifications - A system which is used to measure properties by their potential as an investment, based on geographic, demographic and physical characteristics.
Class A - These properties are of the highest quality and are usually newer properties built in the last 15 years. They typically have the best amenities, location, views and are professionally kept.
Due to these reasons, class A properties tend to be more expensive than properties in other classes and usually have little to no maintenance required before you move in.
Class B - These properties are a step down from class A and are usually a bit older. They will typically have less amenities, be in a less desirable location and/or need a few minor maintenance issues dealt with.
However, these properties are usually in overall good condition and very livable right away. Many real estate investors see these properties as a “value - add” investment since they can be upgraded to a class A with a few renovations or repairs.
Class C - Class C properties tend to be over 20 years old and in need of renovations or significant repair in order to bring the property up to date. “Fixer - upper” is a term used to describe many class C properties because of this reason. They are also not usually in desired locations and are therefore more affordable than the other classes of properties.
Acquisition Cost - This is the total cost of purchasing the property. It includes the closing costs, mortgage, inspection fees, down payment etc.
Turnkey Property - This is a property that does not need any repairs or renovations, it is ready to move into as soon as the deal is done.
Loan to Value Ratio - The metric lenders use to measure the total amount of the loan a buyer requested vs the value of the property. It is used to determine risk of the loan and in general, lenders require a maximum LVR of 80%.
Adjustable Rate Mortgage - A mortgage where the rate varies over the course of the loan based on the benchmark interest rate that fluctuates due to market conditions.
Fixed Rate Mortgage - A mortgage where the rate remains consistent over the life of the loan.
Interest Rate - The cost for borrowing money for a mortgage, accrued at a rate set by the lender and paid off over the life of the loan in addition to the principal amount borrowed.
Proof of Funds - This is a statement from a financial institution that states the buyer has enough money to go forward with the purchase of the property.
Real Estate Owned - This means that a bank had to foreclose on the property and they now own it. These properties tend to not be in the best of shape and therefore tend to sell below market value. Depending on the situation and the condition of the home, they can be very attractive opportunities.
Assessment - The act of determining the value of your property, usually for tax purposes.
Assessed Value - This is the value of your home once the assessment is completed.
Appreciation - This means the amount that the value of your home increases over time. This could be due to upgrades you do on the home, market trends, or inflation.
Depreciation - This means the amount that the value of your home decreases over time, usually due to wear and tear or damage.
Property Management - Individuals or companies that are paid by the property owner or landlord to manage the day-to-day operations of the property. Most often used by remote investors or investors with large portfolios.
Remote Investing - Real estate investing done away from the geographical location of the investor. This is done so that investors can buy into favourable markets that are not close to them geographically. Remote investing usually involves a property manager or building manager to take care of the day-to-day operations of the property.
Carrying Costs - Cost of holding a particular property. These are costs that investors take into account when budgeting things like renovations and maintenance. Included are things like property taxes, mortgage, and utility bill payments.
Capital Improvements - Any permanent improvement to a property that adds to its value. Ex. new appliances, amenities, adding a pool etc.
Equity - The difference between the amount left on a properties mortgage and the value of the property. As the owner continues to pay off the mortgage and assuming the value of the property increases over time, the equity figure should increase over the life of the property.
Principal Reduction - The amount of your mortgage payment that goes towards the principal amount owed, not the interest.
Vacancy Rate - The percentage of unoccupied units in your rental property.
Tenant Screening - This is the process of finding a tenant to rent from you and includes a background check, reference check, and a screening interview.
Rental Property - Investment property where the owner receives monthly rent payments in exchange for tenants to live on their property.
Rental Income - Income generated from the rent payments the owner receives from their tenants
Rental Property Calculator - Often used to evaluate the quality of an investment property prior to buying. This is an online tool that takes into account the estimated costs associated with owning the rental property to determine the ROI, cash flow and IRR.
Internal Rate of Return - A measure of an investment property’s profitability over the life of the property. IRR takes into account the annual cash flows of the property and the estimated change in equity.
Also defined as the point where value of the expenses equals the income generated - the point where the property becomes profitable
Single-Family Home - A free-standing residential property not attached to any other residential or commercial properties
Multi-Family Home - A residential property designed to house many different tenants (or groups of tenants) in separate units within a single structure
Mixed-Use Building - A property zoned for both commercial and residential use (e.g. a multi-family home where the ground floor is a convenience store)