Real Estate Investment Terms
What are real estate investment terms exactly? When trying to study about investing in property and becoming successful, vocabulary just may slow you down. Learning all about investments involves many facets of the business world and having enough knowledge will only increase the possibility of success. These definitions will hopefully make your journey to financial freedom both possible and easy.
- Amortization Schedule. An Amortization schedule is a real estate term referring to a detailed paper showing how the interest and principal payment is spread out over the cost of the loan. In the beginning of the loan, there is mostly interest, but as the borrower pays more on the loan, the interest becomes less and the principal payment becomes greater.
- Adjustable Loan Rates. Adjustable loan rates are used daily in real estate investment. The term adjustable loan rates simply mean a loan that has an interest rate that adjusts on a regular basis. It could be monthly, quarterly, or twice a year. An adjustable loan is good for someone intending to stay in the property for less than two years.
- Annual Percentage Rate (APR). The APR, or annual percentage rate, is the cost of the money borrowed expressed yearly to include: interest, points, origination fees, and closing costs. All real estate investment loan contracts will show the cost of the loan in APR terms. The initial interest rate may be 6%, but the APR is 6.24%. This is due to the fact that the cost of acquiring the loan is included.
- Conventional Loans. A conventional loan is a loan that a borrower receives with normal guidelines, such as a fixed rate loan with 20% down payment. A conventional loan would not include a FHA insure loan or other types of governments loans like VA, Fannie Mae, and Freddie Mac.
- Commercial Real Estate. There are two types of real estate investments and those are residential real estate and commercial real estate. Commercial real estate would include properties such as: large apartment buildings with five or more apartments, garages, storage facilities, malls, shops, restaurants, and farm land.
- Due Diligence. Due diligence is a real estate investment term used daily in the acquisition of investment property. Due diligence is the thorough researching of the property, finances, and contracts involved in the sale of the property desired. This could include: net sheets, title reports, neighborhood problems, finance options, and reasons the investment property is being sold at this price.
- Escrow. Escrow is a third party that holds both the deposits and paperwork for the agents, borrower, and seller of said property. The escrow company is a major part of investing in real estate. Escrow officers are the ones who notarize all loan documents and the ones who issue the original escrow papers that bind both the seller and the buyer when purchasing investment property.
- Fixed Rate Loans. The real estate investment term "fixed rate loans" refers to loans where the interest rate never changes for the entire length of the loan. The taxes and insurance can change, but not the interest rate.
- Net Sheet. In real estate investing, a net sheet will show the entire cost of running the property as a business. A net sheet should show: mortgage costs, taxes, insurance, repairs of the property, gardener's fees, management fees, utility bills, and a vacancy allowance. A normal vacancy allowance is 15% to 25%.
- Private Mortgage Insurance (PMI). Private Mortgage Insurance is insurance for the lender. It does not help the borrower at all. It is applied to loan payments when the borrower puts down less than 20%. VA and certain types of loans do not require PMI, though. FHA insured loans require PMI, but the rates and the escrow impounds are less than normal PMI rates.
- Residential Real Estate. Residential real estate is an investment term referring to the type of property being invested in. Residential real estate would include both single family homes and apartments with one to four units. Residential properties are easier to finance also. Real estate investments involve two types of properties and the other type is commercial real estate.