In this article, we will study some basic key terms and and most popular words of real estate business.
In my mind, every new career is destined for success even when we are totally beginners in that area. One of the best strategies to succeed is being eager enough to learn and follow those who are more experienced. There are infinite ways to learn the necessary advice or even tricks from experts in order to progress faster in the real estate realm. Luckily, nowadays with the aid of the internet, it’s much easier to gain the desired knowledge in an instant.
As it is easy to guess, we are a group of people inclined enough to empower ourselves to turn into successful realtors in the near future. To become a professional in every field, we need to devote our time, energy, and at some point, even our money to the desired goal. Since we can benefit from the shared knowledge of professional realtors, we can make ourselves prepared pretty fast. As an example, we can use this article as a guide to get acquainted with some of the most popular words for real estate business. In this article, we will study some basic key terms and real estate phrases. So let’s dive into this new world together.
These real estate words are pretty elemental in the real estate market, and I’m sure you have heard many of them already. In the beginning, we all start in a world where these concepts are foreign. So, here we want to go over these terms quickly and try to understand their exact meaning and proper use in different contexts.
What is Real Estate?
The very first phrase is real estate itself. When we are talking about real estate, actually we are talking about something which is tangible, something that we can touch. Some buyers find investing in real estate more fun in comparison to the alternatives because they believe they are paying money for something they can feel. Here comes the answer to the question:
Real estate includes the land and the house, so when we say real estate, there is a value on the land, and also on the home.
Do you know what makes real estate one of the best investment options? It’s simple: because more land can not be made, the value of the land tends to go up over time due to the demand increase caused by population growth. The greater the population increase, the greater the value of real estate. Logically, it is profitable to invest in real estate, isn’t it? The next fundamental word for a better understanding of the real estate market is equity.
Real Estate Phrase: Equity and Mortgage
Equity is the difference between the fair market value of the property and the amount of money you owe on the mortgage. Let’s discuss it further in two possible scenarios.
First scenario: imagine we have a house with a value of $200,000. This means that’ the buyer could buy this house outright for $200,000 in cash, and the owner would provide a clear title with no bank involved.
In the second case scenario, the buyer could get a mortgage. A mortgage is a loan that a bank lender gives you to help finance the purchase of a house. In the real estate industry, it’s very common to get a mortgage. Consider a case where the buyer doesn’t have enough cash to buy the home outright, but knows that he can go to the bank and get a mortgage. It means that actually at this point, the bank owns the house. However, he makes regular payments to buy it back from them. Sounds perfect, doesn’t it?
Let’s just say that the value of the house is $200,000, but the buyer was able to purchase it with a mortgage, including a 5% down payment for $160,000.
In this scenario, what is equity?
If we do the calculation, it becomes clear that the buyer owes the bank something around $152,000, and this is exactly the amount that the bank expects him to pay them back. Keep in mind that, a typical mortgage is going to be what is called a 30-year mortgage. In this type of mortgage, the buyer will pay back the $152,000 over 30 years plus some interest along the way. Now here comes the answer: the buyer owes $152,000, but the house is worth $200,000. The difference between what he owes and what it’s actually worth, is equity. So in this example, the equity of this property is $48k.
If in the future, if the value of the property rises, and the buyer keeps making loan payments, his equity in the home should go up.
Real Estate Phrase: Landlord and Cash Flow
After some time, the buyer becomes a landlord. He can control the house and do whatever he wants with it, so he decides not to live in this house anymore. He wants to rent it.That renter is going to pay him $1300 per month. His mortgage is $1.000 a month, but he is collecting $1300. The difference between his mortgage and the rent is $300. We can call this a cash flow, and for a year it’s $3600. You might say that this is the same as his profit. You’re right! Profit, or net income, is always the starting point for cash flow.
Real Estate Phrase: Tenant and Rental
So all of a sudden, who is he going to put in the house? That person is called a tenant. And because the owner of the property is collecting rent here, we call this home a rental.
Real Estate Word: Flip
Sometimes, instead of moving out of the house to rent it, the owner decides to fix it up and put it back on the market. Let’s say even though the home’s real value is $220,000, lists it to sell for $200,000. Remember he bought it for $160,00, so he’s still making a profit. This is what we call flip: the practice of buying a home and quickly reselling it for a profit, usually after making repairs or improvements.
Real Estate Phrase: Under Contract
The last but not least term we will learn today is under contract. So let’s say, a new buyer comes and goes under contract for $190,000. Under contract means the buyer has signed a piece of paper called REPC (Real Estate Purchase Contract), to buy the home for $190,000. A month goes by, and the bank swoops in. The bank wants to buy out the owner, and there’s some leftover money in this transaction. Remember the owner owes $152,000, while the bank is willing to pay $190,000 per the REPC (we are going to keep the closing costs and realtors fees out of it to make it simple). Although he no longer owns this real estate, he has a $40,000 check, plus any money that he has made along the way in rent and tax advantages.
Friends, this is the story of real estate. It’s the language that matters very much here. So, I hope today’s message on real estate vocabulary was helpful and brought clarity to all of us as beginners. I believe now we are ready for some more advanced training. The best we can do is keep learning new vocabulary and words, combine them together, and in a lifetime, this can have a huge impact on where we end up. Are there any other key terms that should be added to the list? Leave them in a comment down below.
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