If you’re looking to get into real estate investing, the first thing you need to know are the 10 key terms every real estate investor should know.
This acronym stands for “Real Estate Owned” and is mostly commonly referred to as REO. Real Estate Owned refers to a property that was foreclosed and is now usually owned by someone with little to no emotional connection to the property.
Whenever a property is listed as REO, it simply means your best strategy is to work with the listing agent to find out your best course of action.
NOI stands for “Net Operating Income” and refers to the amount of profit an investor would make on a rental property if the mortgage was paid. An easy way to understand NOI is by calculating the overall expenses/vacancies minus the amount of rent paid. On its own, NOI isn’t entirely useful since it doesn’t tell the whole financial story, but it can be good to know if you’re ever looking to sell or compare other real estate opportunities.
When you pay the mortgage on your investment property, the money you pay doesn’t apply evenly to the interest and principal. Over time, more of the money is applied to the principal, while less goes towards interest. This process of gradually paying off the initial cost of the principal of your investment is called amortization.
LTV stands for “Loan to Value.” LTV comes up when a lender decides to provide funding based on a percentage of a property’s actual value. This value could refer to the property’s value before or after repairs, so it’s important to know the value your funding source is referring to.
5. Personal Guarantee
A personal guarantee is important for any investor to understand. Even if a mortgage is approved for an LLC or investment company, an individual may be asked to pledge a personal guarantee. This means that individual’s assets and individual credit are on the hook for the duration of the loan. If you’re signing a personal guarantee, it’s important to understand the stakes before agreeing.
6. Capital Expenses
You may have heard this term before, but few people know what it really means. Capital expenses refer to money set aside, usually each year, to cover large repair or replacement expenses that may arise. Often referred to as “CapEx,” it’s often encouraged to create a line item in your expense budget for anything that falls under this category.
7. Debt Service
Debt service is another term that gets thrown around in the investment world, and it really just refers to the investment property’s mortgage payment. Debt service refers to the balance being paid on the loan, including both the principal and interest payments.
8. Short Sale
A short sale refers to any real estate transaction where a property was sold for less than the amount owed on the loan. When this happens, the lenders agree to release the homeowner from their loan and accept less than what is owed to them. The bank then takes on control of the home.
For investors, short sale properties often require investors to work with the bank’s real estate agent to negotiate. Purchasing a short sale property can be more affordable than other investment properties, but can take more time to finalize a sale.
BPO is short for “Broker Price Opinion” and refers to a broker’s individual opinion on the actual value or estate of a real estate property. While a BPO is not as comprehensive as an appraisal, it can be helpful in determining whether a property is a good fit for your investment plan. BPOs are often offered to investors instead of appraisals for short sale properties or REO investment deals.
This abbreviation refers to “Dollars per Square Foot.” By breaking down the amount of money a property costs per square footage, it can be easier to determine if it’s the right investment property for you. Figuring out the dollars per square foot can also help investors compare different properties to decide which deal is the better one.
If you’re ready to get started on building your investment portfolio, come talk to us