When you are just starting out on your real estate investing journey, you will quickly find out that there are a lot of terms, acronyms, and words that can be confusing. Learning about these terms and phrases can help you understand more about real estate investing and it can make it easier and less confusing to educate yourself. Here are some of the key real estate investment terms and strategies you should learn about:
Real Estate Investment Strategies
When you get started investing in real estate, one of the first things you will have to do is decide on the type of investment strategy you prefer. While most investors will end up using more than one strategy, it’s essential to understand them to choose which strategy is ideal for each property and situation.
REITs (Real Estate Investment Trusts): REITs are companies that own, operate, or finance income-producing real estate across a range of property sectors. REITs allow investors to invest in real estate assets without directly owning or managing properties, often providing liquidity and diversification. Remember, REITs are companies that invest in real estate, so if you buy stock in a REIT you actually own part of the parent company, not specific properties. While this may seem like a small, insignificant matter, it can affect how the investment operates and your tax situation.
Syndications: A syndication is a form of real estate investment where multiple investors pool their resources to collectively purchase and manage investment properties. Syndications are typically structured as partnerships or LLCs, with one or more sponsors or general partners responsible for managing the investment and decision-making process. Unlike REITs, when you invest in a syndication you actually own parts of the property or properties themselves, rather than stock in the parent company. This allows syndications to run differently than REITs because they usually aren’t publicly traded companies. Visit this site to learn more about the difference between syndication and REIT investments.
Fix and Flips: This is the name for a short-term investment strategy where an investor purchases a distressed or undervalued property, renovates or improves it, and then sells it for a profit within a relatively short period. Fix and flips require careful analysis of market conditions, renovation costs, and potential resale value to ensure profitability. While these projects were very common in past years, the ability to find and affordably renovate distressed property can fluctuate depending on conditions such as the housing market, labor market, location, and even the cost of materials such as lumber and paint. It’s essential for anyone considering these investments to carefully evaluate the property and understand their ability to calculate and estimate repair costs. It’s also essential to have a good understanding of the housing market and current fluctuations. Flipping properties carries both a higher risk and a higher potential return than other real estate strategies.
Buy and Hold: This is a long-term investment strategy where an investor purchases a property with the intention of holding onto it for an extended period, typically to generate rental income and benefit from property appreciation over time. While some buy-and-hold properties are commercial buildings or vacant land, the most common scenario for buy-and-hold investments is that of single-family homes or small multi-family properties like duplexes. This is one of the easiest investment strategies for beginning investors to break into, especially if they have relatively good credit and enough money for a small down payment. While this can be a relatively low-risk investment, it’s still essential for beginning investors to understand how to value properties and estimate expenses in order to ensure the property is profitable.
Wholesaling: Wholesaling is a real estate investment strategy where an investor contracts a property with the intent to assign the contract to another buyer for a fee. Wholesaling involves finding deeply discounted properties and quickly selling the rights to purchase them to other investors without actually taking ownership of the property. Wholesaling can be ideal for people who don’t have much capital or leveraging ability, but it can be risky and requires not only an understanding of the local market conditions but also a large audience of potential purchasers and the ability to market properties successfully. If you cannot find a purchaser to assign the contract to, you will usually have to purchase the property yourself.
Basic Real Estate Investing Terms to Know
Besides understanding the basic real estate investment strategies, you should also understand basic real estate terms. Here are some of the real estate terms that you are likely to encounter early in your investment journey:
Property Appreciation: This term refers to the increase in the value of a property over time due to various factors such as market demand, improvements, and economic conditions. When a property appreciates, it becomes more valuable without any additional input or value-added activities such as renovation, building, or updates. Depending on the location, appreciation can be one of the easiest and most reliable ways to build wealth. However, it can be risky depending on the location (properties can lose value in some areas) and it can take a long time.
Cash Flow: Cash flow is the term for income generated from a real estate investment after deducting operating expenses, mortgage payments, and taxes. Properties that provide cash flow are usually buy-and-hold properties such as rental homes or commercial properties rented to businesses. Cash flow, unlike appreciation, provides regular liquid income for investors. While cash-flowing properties can be hard to find depending on the area where you are investing, this can be a great way for investors to add to their monthly income. There is a risk with this investment strategy, and investors need to estimate income and expenses accurately.
Equity: Equity is the difference between the market value of a property and the outstanding balance of mortgage loans or other debts secured by the property. When you purchase a property with a loan, you usually own very little equity. Over time, as the loan is paid down or the property appreciates, your equity in the property will go up.
ROI (Return on Investment): The return on investment is a measure used to evaluate the profitability of an investment. It is calculated as the ratio of the net profit to the initial investment amount, usually expressed as a percentage. When you purchase a property, accurately estimating expenses and income is important to be able to predict the ROI and decide if the purchase is a good investment.
Appraisal: The appraisal is a professional assessment of the value of a property. It is conducted by a licensed appraiser and is often required by lenders before approving a mortgage loan. The appraisal will give you and the lender an idea of the value of the property. If your appraisal is significantly higher than your offer, you will immediately have more equity in the property upon purchase. If the appraisal is lower than your offer, the property may not qualify for the loan or you may have to make up the difference with a higher down payment.
Conclusion
No matter what investment strategy you choose, it’s important to understand the basics of each strategy, along with the positive and negative factors of each. It’s also essential to learn what you can about real estate investments and know the basics of common real estate terminology. Learning what you can about these basics will help you go farther in your real estate investment journey.
