Real estate is one of those industries that has plenty of jargon. Some terms may sound like a totally different language. For regular consumers, it is not critically important to understand all the jargon. For real estate investors, industry jargon matters. Here are some of the terms investors should add to their daily vocabulary.
Net Operating Income
Known as NOI, this term defines how much cash flow investors generate if there is no lien or mortgage on the property. Most investors calculate NOI on an annual basis minus vacancy rates and expenses. Experts say investors should see a 40 to 50 percent NOI when compared to net rental income.
The capitalization rate, also known as the cap rate, is used to determine an investment’s annual return based on the estimated profit generated from a property in one year. To calculate the cap rate, divide the above mentioned NOI by the sales price or the appraised value of a property.
Real Estate Owned
When investors use the term real estate owned (REO), they are referring to a property that is currently owned by a bank. In most cases, the property went into foreclosure, and the bank listed the property for sale at a public auction. When a property does not sell at auction, the bank must maintain possession of the property. REO properties are popular among real estate investors since banks often list these homes for much less than their appraised value.
The goal of any investment property is to make money by renting or by capital appreciation, also known as capital gain. To determine the capital gain of a property, subtract the current value of the investment by the purchase price. If there is a gain in value, investors must pay a capital gains tax. However, the tax is not applicable until the asset is sold