If you’re new to the real estate space, learning how to work property investment terms into casual conversation with other investors can take your credibility, and your career, a long way.
This piece covers five of the most fundamental words in real estate investing terminology and what they mean. So whether you’re doing a deep dive property value analysis using real estate comp tools or weighing the pros and cons of short vs. long term investments, using these words correctly will help you sound like a real estate pro.
5 Common Words In Real Estate Investing Terminology
Equity
Equity is the basis of all value in the real estate world, so it’s good to make sure you have a crystal clear understanding of it.
Equity is the difference between the amount your home is worth and the amount left to pay on the mortgage. As homeowners pay off their home, the gap between what they owe on the home and what they can sell it for widens.
The bigger this gap, the more equity a home has.
Think of it like this - Equity is how much cash would be in your pocket if you sold the home today. So if you sold the home for $100, and you owed the bank $80, you would have $20 in your pocket. Conversely, if you sold the home for $100 and you owed the bank only $20, you’d walk away with $80 in your pocket.
The person in the second example has higher equity.
One thing you’ll see a lot of in real estate investing vocabulary is the concept of “building equity.” When you make home improvements, you increase the value of the property, which widens the gap between what the home is worth and how much you owe on it. This, in turn, builds more equity.
Appreciation
In real estate investing, appreciation refers to the value of a property increasing over time due to external factors like inflation, a strong economy, job markets, etc.
When you’re dropping real estate investing terms into conversation, be careful not to confuse appreciation with building equity. Building equity usually results from home improvements like kitchen remodels or installing a new roof. Appreciation is passive, and only time can make assets like real estate investments appreciate in value.
Cash Flow
In property investment terms, cash flow means how much money is in your pocket at the end of the month, once all expenses are accounted for.
Cash Inflow vs. Outflow
To determine overall cash flow, you have to look at cash in and cash out each month. Cash inflow comes from the monthly rental income you collect.
Here are some examples of cash outflow:
- Property management fees
- Mortgage
- Property taxes
- Home insurance
- Capital Expenditure
If your cash inflow is greater than your outflow, then you have positive cash flow.
While there are some cases where it makes sense to own a property with negative cash flow (for example, there is an economic recession and you’re holding the property until the economy improves so you can sell at a profit), investors new to real estate should always aim for a positive cash flow from rental properties.
In terms of financing deals, ‘cash flow’ is one of the most powerful real estate investing terms to know. If you’re looking to finance your investment property using a bank loan or other third-party financing, and you’re able to demonstrate how your property will be cash-positive, you are far more likely to score financing.
Long Term vs Short Term Rental
People new to real estate investing terms sometimes mix up “long term” and “short term” rentals, which is a dead giveaway of a newbie investor.
What Is A Long Term Rental In Real Estate?
Investors interested in long term real estate rentals are looking to buy a property and rent it out to long term tenants for 6 months to 1+ years.
Area and property type will be very strong determining factors as to whether a property is a long or short term rental. For example, if you find a starter single-family home in a suburb near an up-and-coming city, you’ll likely want to make that a long term investment. Why?
As a city grows, families eventually start moving out of the city. A small family may not have the economic resources to buy a home quite yet, but they don’t want to be crammed in the city as they start their family. They could be a great fit for your starter home.
You’re perfectly positioned to offer this young family a “stepping stone” home that they can rent yearly while they grow and save up to buy a home of their own.
And once that family moves out, another family moves in - rinse and repeat.
Now, “long term” is one of those property investment terms that trip people up because they feel like they’re locking themselves in.
Quite the contrary, actually. Many investors buy homes as long term rentals in burgeoning areas and rent the home out for 5 - 10 years while the market grows and the home appreciates in value. Then, once the market has matured, they sell and take their profit.
What Is A Short Term Rental In Real Estate?
Short term rental is one of the most popular real estate investing terms of the past few years. Seriously - check out the increase in searches for “short term rentals” on Google below.
Basically, a short term rental is what AirBnB started out doing. It’s a property, typically in a high-traffic area like a city center, that people stay in for a weekend, or maybe even a week.
These types of rentals require a lot more upkeep and ongoing effort to fill vacancies. But, if you can swing those, the yield is usually higher than long term rentals.
Motivated Seller
“Motivated seller” is one of those real estate investing terms that sometimes gets a bad rap, but when actually understood, it’s not a dirty word.
A motivated seller is simply a property owner looking to quickly sell their property. There are a myriad of reasons why people want to sell (we’ll go into those below), and they will often sell at a lower price in order to expedite the sale process.
While this may sound unfair, bear in mind that the buyer usually takes on some risk in this process by forgoing standard risk-mitigating processes (like market analysis) in order to expedite the sale process.
So in the end - the buyer assumes more risk and pays less, and the seller gets money quickly, so they receive slightly less. These are often win-win situations for both buyers and sellers.
Real estate lead gen tools like Leadflow have simplified this previously complex process and have made finding motivated sellers incredibly easy over the past few years. And when it comes to motivated sellers, there are 3 key real estate investing terms to know:
3 Types Of Motivated Sellers
• Absentee Owners
These are property owners that don’t live in, or use, the property that you’re interested in.
• Inherited & Probate Sellers
These are property owners that have inherited the property. Many people don’t want to pay the property taxes on inherited properties and, therefore, are willing to sell at a lower price if it means selling quickly.
• Distressed Seller Leads
These are property owners that are usually behind on tax or mortgage payments for their property, and need to offload it immediately.