If you’re interested in diversifying, real estate investments make a lot of sense. Whether you want an alternative to traditional investments, freedom from a corporate job, or are working towards a secure and independent financial future, passive real estate income is a way to get there.
If you’ve been holding off on making this investment because you don’t understand the terminology and culture involved, don’t hesitate a moment longer. There are plenty of terms out there, but most of them are straightforward. Here are 10 of the most important to know:
After-Repair Value (ARV)
This acronym refers to how much your property is worth once you’ve done all planned renovations and necessary repairs. To determine your ARV, you’ll usually want an experienced agent to give you an estimate.
Buy & Hold Properties
These are properties you buy and plan to keep, usually so you can rent them out. This is opposed to the properties some people buy and in order to flip quickly.
Capitalization Rate (CAP Rate)
This is your net operating income (NOI) divided by the current market value of your property. Investors typically use this number to plan for potential rates of return on investment, though it fluctuates frequently with market and property type.
Cash-On-Cash Return (COC)
This is another ratio, calculated by dividing your annual before-tax cash flow by the total amount of cash you’ve invested in a property. This helps you understand at a glance the total value and equity of whatever property you’re considering.
Clean titles are simple to understand and easiest to work with, but a clouded title refers to any kind of irregularity that could make it difficult to buy or sell a property, like a lien or inheritance claim.
Debt Service Coverage Ratio
Debt service simply refers to the amount of money needed to repay both interest and principal on your property. It’s a slightly complicated way of referring to a mortgage. The ratio is calculated by dividing income derived from the property by expenses needed to maintain it, in order to determine how long it will be before you can completely pay off the debt.
These are properties that aren’t being sold through a real estate agent. Sometimes it’s possible to get a really great deal on FSBO properties, but they can come with encumbrances. Working out the sale can get confusing without professional help.
Gross Operating Income (GOI)
This is all the income you’re generating from a property. It includes rent, of course, but also anything you might make from parking, laundry machines, or other income streams.
Net Operating Income (NOI)
This is your GOI minus whatever operating expenses you need to keep your property going. Knowing your NOI is key to figuring how much passive real estate income you will be able to bring in.
Real Estate Owned (REO)
These are properties that have been foreclosed, meaning the bank now owns the property. These properties can be found in nearly any condition, and some of these homes can be a great investment for a good price. However, they can also come with serious baggage, so it’s always wise to get professional help when looking at REO properties.
Skin in the Game
This is a well-known term generally, but in real estate investment it refers specifically to how much an investor is willing to put into a down payment. Since this is the money that will disappear first if the investment doesn’t pan out, the more “skin you have in the game,” the more lenders will see you as a serious investor.
Build Your Future With Passive Real Estate Income
Real estate investment comes with its own terminology, but navigating it is easy when you subscribe to the Jason Hartman podcast. Listen today to learn more these terms and everything else you need to know to become financially independent through your real estate investments.