If you are investing in property for the first time, you may find yourself overwhelmed by the many new terms and concepts that you will be working with. Real estate investment is a great way for anyone to make a solid passive, supplemental income. Don’t be intimidated by the process – with some good, in-depth research and help from professionals, you will be able to get started investing in property. Here is a basic guide to some of the terms and concepts that you will be exposed to in your first real estate deal, and what they mean for you.
A glossary for investing in property:
Effective gross income
This is the total amount of income that a property is expected to make from all operations. This generally includes an allowance for vacancies and collection losses. This term is used to refer to rental properties, and is sometimes abbreviated as EGI.
This is the process of buying an extremely low-value property, investing time and money into rehabilitating it, and then selling it for a huge profit. Although you have likely seen many shows on TV about investors who make their careers flipping houses, it may not be the most practical use of your time for a beginning investor.
This is the ratio of your total property expenses to your EGI. It is usually expressed in a percentage, and can be used to determine if a property’s expenses are worth the investment. Properties with a lower expense ratio are more desirable.
This is the expected rental price that the property would receive right now if it were on the market. This figure is determined by current rents on comparable properties in your area during the time of evaluation.
This is the loss in property value over time. This number can be projective, (ie. the expected depreciation) or in terms of the actual depreciation of the property.
This term refers to the length of ownership of an investment.
These related terms refer to the overall amount of profit you will make from your investment. ROI stands for return on investment, and it is a broad term referring the overall amount of profit. The capitalisation rate is more specific, and it is determined by calculating your gross annual income from the investment, divided by the cost of the property. This is expressed as a percentage to see how much a property will generate.
Net cash flow
This term is used to refer to your monthly income from the property, minus the total expenses the property incurs every month. This is how much money you will make from the property every month.
Think you’re ready to get started investing in property? Talk to Seajay Mortgage Brokers about applying for a loan.