Investing in real estate is an exciting venture that can bring huge returns. The first step to achieving success in the world of real estate involves learning the terminology. Below, expert Andrew Shader provides his must-know real estate jargon for first-time investors.
Once you familiarize yourself with these phrases, you will be better prepared for making the jump into real estate investment.
Amortization refers to combining principal and interest into payments. The alternative is to simply pay off interest in the early stages of a loan. Instead, amortization allows you to build equity in property earlier in the process, which is essential for improving the profitability of an investment.
Every property must be appraised before a financial institution will issue a loan. A licensed appraiser will determine an approximate value of a property based on a variety of factors. The appraisal acts as a cap that limits how much a financial institution will loan you towards purchasing a property.
Closing costs are a variety of fees added to the final purchase price of a property, including excise taxes, title insurance, and loan processing fees. Generally, the closing costs will be approximately 2-5% of the purchase amount of a property, not counting the down payment.
Depreciation is an accounting method of allocating the cost of a tangible or physical asset over its useful life or life expectancy. Depreciation represents how much of an asset's value has been used up.
Equity refers to ownership. When it comes to property, your equity describes the portion of the home that you own. It is typically expressed in terms of the amount of principal you have paid off, plus any increase in value since you purchased the home. The higher your equity, the more flexibility you have to refinance or sell at a profit.
Conventional home loans are divided into two types, which are fixed-rate and adjustable-rate. As the name implies, a fixed-rate mortgage has a locked-in interest rate that does not fluctuate. Therefore, fixed-rate mortgages are the preferred purchasing method because they include minimal variability in monthly payments.
At the end of the day, financial institutions are looking to profit just like any other business. Their primary means of doing so is by charging interest on mortgages and other loans. Interest is the cost of borrowing funds. The higher your interest rate and longer your repayment terms, the more you will pay for a property during the life of the loan.
The principal is the total amount of money that you borrow to make a purchase. The faster you pay off the principal, the more rapidly you will build equity. Your mortgage payment will be calculated using your interest rate, principal, and insurance costs.
Real Estate Broker
The real estate broker is a particular type of real estate agent that has passed a broker’s exam. To become a real estate broker, the individual must also meet the minimum number of required transactions as outlined by each state. Brokers are allowed to work independently or hire and manage real estate agents.
Now that you are familiar with these key terms, you are well on your way to joining the exciting field of real estate investing!
About Andrew Shader
Andrew Shader is an entrepreneur and a successful real estate developer and investor in Fort Lauderdale, Florida. He got his Business Management and Marketing degree from Florida State University. After spending years in the insurance industry, Mr. Shader decided to shift his focus to real estate. Andrew specializes in value-added properties and boosting property value through investment.