Essential Real Estate Terms to Know: A Comprehensive Guide for Investors
Understanding real estate terminology is crucial whether you’re a seasoned investor or just starting your investment journey. The right knowledge can empower you to make informed decisions, spot lucrative opportunities, and avoid common pitfalls. From understanding market trends to negotiating deals, knowing key terms like ROI, cash flow, and appreciation can significantly impact your investment success.
In this guide, we break down the most important real estate terms every investor should know. Our easy-to-understand definitions will help you navigate the complexities of real estate, giving you the confidence to make sound investment choices. Whether you're exploring your first property or expanding your portfolio, mastering these terms will set you up for success in the fast-paced world of real estate investing when you join our online real estate investing platform.
A
Absorption Rate: A metric used in real estate to assess the rate at which available homes are sold in a specific market during a given time period.
Adjustable-Rate Mortgage (ARM): A mortgage with an interest rate that adjusts periodically based on an index, which can cause payments to increase or decrease over time.
Amortization: The process of gradually paying off a mortgage loan through regular payments of principal and interest.
Appraisal: An evaluation of a property's market value by a licensed appraiser, often used by lenders to determine the loan amount.
Appreciation: The increase in the value of a property over time, often due to factors like market demand, inflation, or improvements made to the property. Our Yucaipa Real Estate property, The Logan, is an example of an investment property benefiting from appreciation.
Assessed Value: The value assigned to a property by a public tax assessor for the purpose of determining property taxes.
Assumption: The transfer of a seller’s existing mortgage to the buyer, allowing the buyer to continue making payments under the original terms.
B
Balloon Mortgage: A type of loan that offers lower monthly payments at first but requires a large payment at the end of the loan term.
Bridge Loan: A short-term loan used to bridge the gap between the sale of one property and the purchase of another, typically with higher interest rates.
Broker: A licensed individual or firm that arranges transactions between buyers and sellers, typically earning a commission.
Building Code: Regulations that specify the standards for construction, design, and materials used in buildings to ensure safety and health.
Buyer's Agent: A real estate agent who represents the buyer in a transaction, helping them find and purchase property.
C
Capitalization Rate (Cap Rate): A measure used to estimate the return on investment in real estate, calculated by dividing the net operating income by the property’s current market value.
Cash Flow: The net income generated from a rental property after all expenses, including mortgage payments, have been deducted.
Cash-on-Cash Return: A metric used to measure the annual return on an investment property relative to the amount of cash invested. Those looking for real estate investing in Texas through mogul have enjoyed robust monthly cash-on-cash returns.
Chain of Title: The history of ownership transfers for a property, showing who has owned it over time.
Closing Costs: Expenses over and above the property’s purchase price, including fees for the loan, appraisal, title insurance, and inspections.
Closing Disclosure (CD): A five-page form that provides final details about the mortgage loan, including the loan terms, projected monthly payments, and how much you will pay in fees and other costs.
Collateral: An asset pledged by a borrower to secure a loan, which can be seized by the lender if the loan is not repaid.
Commission: The fee paid to a real estate agent or broker for facilitating the sale or purchase of a property, typically a percentage of the sale price.
Comparable Sales (Comps): Recent sales of similar properties in the same area, used to determine a property’s market value.
Condominium (Condo): A type of property ownership where individuals own a specific unit within a larger building or complex and share ownership of common areas.
Contingency: A condition that must be met before a real estate contract becomes binding, such as securing financing or a satisfactory home inspection.
Conventional Loan: A mortgage that is not insured or guaranteed by the federal government, often requiring a higher credit score and down payment.
Cooperative (Co-op): A type of housing where residents own shares in a corporation that owns the entire building or complex, rather than owning individual units outright.
Counteroffer: A response to an offer in a real estate transaction, where the original terms are modified or new terms are proposed.
Covenant: A legally binding promise or restriction on the use of property, often found in deeds or homeowner association agreements.
Credit Score: A numerical representation of a borrower’s creditworthiness, based on their credit history, used by lenders to assess the risk of lending.
D
Debt Service Coverage Ratio (DSCR): A ratio used by lenders to determine if a property generates enough income to cover its mortgage payments, calculated by dividing the net operating income by the total debt service.
Deed: A legal document that transfers ownership of property from one person to another.
Default: The failure to fulfill a legal obligation, such as making timely mortgage payments, which can lead to foreclosure.
Depreciation: The reduction in the value of a property over time, often due to wear and tear, used for tax purposes to offset income.
Disclosures: Information about a property’s condition or history that must be provided by the seller to the buyer, often required by law.
Down Payment: The initial payment made when purchasing a home, typically expressed as a percentage of the purchase price.
Due Diligence: The investigation and research conducted by a buyer before purchasing a property, including inspections and reviewing financial documents.
Duplex: A residential building divided into two separate units, each with its own entrance, often occupied by two different households.
E
Earnest Money: A deposit made by a buyer to demonstrate their commitment to purchasing a property, typically held in escrow until closing.
Easement: A legal right to use another person’s land for a specific purpose, such as access to a road or utility lines.
Eminent Domain: The government's power to take private property for public use, with compensation provided to the property owner.
Encroachment: An unauthorized extension of a building or structure onto another person’s property.
Equity: The difference between the current market value of a property and the amount still owed on the mortgage.
Equity Multiple: A metric used to measure the total cash return on an investment relative to the amount of equity invested, calculated by dividing the total cash distributions by the total equity invested.
Escalation Clause: A contract provision allowing for an increase in the offer price if a higher competing offer is received.
Escrow: A third-party account where funds or documents are held until all conditions of a real estate transaction are met.
Exclusive Listing: An agreement between a seller and a real estate agent giving the agent the exclusive right to sell the property for a specified period.
F
Fair Market Value: The price a property would sell for on the open market, based on comparable sales and market conditions.
FHA Loan: A mortgage insured by the Federal Housing Administration, often allowing for lower down payments and credit scores.
Fiduciary Duty: The legal obligation of a real estate agent to act in the best interest of their client.
Fixed-Rate Mortgage: A mortgage with an interest rate that remains the same for the entire term of the loan, providing consistent monthly payments.
Foreclosure: The legal process in which a lender takes ownership of a property after the borrower fails to make mortgage payments.
Fractional Investing: The ability to invest in a fraction of a home, enabled by platforms like mogul Club.
FSBO (For Sale By Owner): A property that is being sold directly by the owner without the assistance of a real estate agent.
G
Gross Income: The total income generated by a property before any expenses are deducted.
Ground Lease: A lease agreement where a tenant is allowed to develop a piece of land during the lease period, after which the land and all improvements are returned to the landowner.
Guarantor: A person who agrees to be responsible for the debt of another person, often used in rental agreements and loans.
H
Home Equity Line of Credit (HELOC): A loan in which the lender agrees to lend a maximum amount within an agreed period, with the borrower using the equity in their home as collateral.
Home Inspection: An examination of a property's condition by a professional inspector, typically required before the sale of a home.
Homeowner's Association (HOA): An organization in a subdivision or condominium that makes and enforces rules for the properties and residents.
Homeowner's Insurance: A policy that covers loss or damage to a home, including coverage for personal liability and theft.
HUD-1 Settlement Statement: A form used in real estate transactions that itemizes all charges imposed on the buyer and seller, required for most transactions before October 2015.
I
Interest Rate: The percentage of a loan amount charged by the lender for borrowing money, typically expressed as an annual percentage.
Internal Rate of Return: A financial metric used to evaluate the profitability of an investment over time. It represents the annualized rate of return that makes the net present value (NPV) of all cash flows (both incoming and outgoing) from the investment equal to zero.
Investment Property: Real estate purchased to generate income or profit, either through rental income or future resale.
J
Joint Tenancy: A form of property ownership where two or more people own equal shares of a property, with the right of survivorship.
L
Lease Option: A contract that allows a tenant to lease a property with the option to purchase it at a later date, typically with a portion of the rent applied to the purchase price.
Leverage: The use of borrowed capital, such as a mortgage, to increase the potential return on investment by purchasing property. By using leverage, investors can control a larger asset with less of their own money, amplifying gains (or losses) compared to investing without borrowing. This is highlighted as an option for people to invest in real estate with little money.
Lien: A legal claim against a property, often used as security for a debt, that must be paid off when the property is sold.
Listing Agent: The real estate agent who represents the seller in a transaction, helping them market and sell the property.
Loan Estimate: A form provided by lenders to borrowers within three days of receiving a mortgage application, outlining the estimated terms and costs of the loan.
Loan-to-Value Ratio (LTV): A measure used by lenders to assess risk, calculated by dividing the loan amount by the appraised value of the property.
M
Market Rent: The estimated amount of rent that a property could command in the open market, based on current demand, location, and comparable properties.
Market Value: The amount for which a property would likely sell in a fair, open market, taking into account current conditions and recent sales.
Mortgage: A loan used to purchase real estate, where the property itself serves as collateral for the loan.
Multiple Listing Service (MLS): A database used by real estate agents to list and find properties for sale, facilitating cooperation between agents.
N
Net Operating Income (NOI): The income generated from a property after all operating expenses, but before mortgage payments and taxes, have been deducted.
Notary: A public official authorized to witness the signing of legal documents, often required for real estate transactions.
O
Offer: A proposal made by a buyer to purchase a property, typically outlining the price and terms of the transaction.
Offer: A proposal made by a buyer to purchase a property, typically outlining the price and terms of the transaction.
Open House: A scheduled period when a property for sale is open for viewing by potential buyers without an appointment.
Origination Fee: A fee charged by a lender for processing a new mortgage loan, usually expressed as a percentage of the loan amount.
P
Pre-Approval: A preliminary evaluation by a lender indicating that a borrower qualifies for a mortgage loan up to a certain amount.
Prepayment Penalty: A fee charged by some lenders if the borrower pays off the loan early, before the end of the term.
Principal: The original amount of money borrowed on a mortgage, excluding interest.
Private Mortgage Insurance (PMI): Insurance that a borrower may be required to purchase if their down payment is less than 20% of the home’s value, protecting the lender in case of default.
Property Tax: A tax assessed by the local government on the value of a property, typically used to fund public services.
Purchase Agreement: A legal document that outlines the terms and conditions of a real estate transaction between a buyer and seller.
R
Real Estate Investment Trust (REIT): A company that owns, operates, or finances income-producing real estate, allowing investors to buy shares in commercial real estate portfolios.
Refinancing: The process of replacing an existing mortgage with a new one, often to secure better terms or lower interest rates.
REO (Real Estate Owned): Property owned by a lender, typically a bank, after an unsuccessful sale at a foreclosure auction.
Reverse Mortgage: A loan available to homeowners aged 62 or older that allows them to convert part of the equity in their home into cash.
Right of First Refusal: A contractual right giving a party the opportunity to match an offer before the property is sold to someone else.
S
Sale-Leaseback: A real estate transaction in which the owner of a property sells it to another party and then immediately leases it back from the new owner. This allows the seller to access capital while retaining the use of the property for a specified period.
Seller's Agent: A real estate agent who represents the seller’s interests in a transaction, also known as a listing agent.
Single Family Rentals (SFRs): Standalone residential properties, such as houses or townhomes, that are rented out to a single tenant or family, offering privacy and more space compared to multi-family units. They are popular investment choices due to strong demand, potential for steady cash flow, and long-term appreciation.
Short Sale: A sale of property in which the proceeds are less than the amount owed on the mortgage, often requiring lender approval.
Survey: A professional assessment that determines the boundaries, size, and physical features of a property.
T
Tenancy in Common: A form of property ownership in which two or more people own a property together, with each having a divisible interest that can be sold or inherited.
Title: The legal right to ownership of a property, evidenced by a deed.
Title Insurance: A policy that protects the buyer and lender against losses arising from disputes over the ownership of the property.
Transfer Tax: A tax imposed by the state or local government when the ownership of property is transferred from one party to another.
U
Underwriting: The process by which a lender evaluates a borrower’s eligibility for a mortgage, assessing their credit history, income, and other factors.
Use Variance: A type of zoning variance that allows a property to be used in a manner not typically permitted by the zoning ordinance, often requiring approval from a zoning board.
V
Vacancy Rate: The percentage of all available units in a rental property or market that are vacant or unoccupied at a given time, used to measure the supply and demand of rental housing.
Variable-Rate Mortgage: A type of mortgage where the interest rate can change periodically, typically tied to an index, leading to fluctuations in payments.
VA Loan: A mortgage loan in the United States guaranteed by the U.S. Department of Veterans Affairs, available to military veterans and active service members.
W
Walk-Through: A final inspection of a property by the buyer before closing, ensuring that the property is in the agreed-upon condition.
Warranty Deed: A legal document that guarantees a property is free of any claims or liens and that the seller has the right to transfer ownership.
Wraparound Mortgage: A type of loan where the seller retains an existing mortgage while giving the buyer a new loan that “wraps around” the old one, usually at a higher interest rate.
Z
Zoning: Laws and regulations that define how property in specific geographic zones can be used, such as for residential, commercial, or industrial purposes.
Zoning Variance: A legal exception to zoning regulations, typically granted to allow a property to be used in a way that is not normally permitted under the zoning ordinance.