Here is a list of common real estate terms investors need to know to be more effective in managing investment properties and owning listed real estate securities.
Related: Is there a Sydney housing bubble? read our latest analysis on Sydney and Melbourne house prices.
Buy and Hold strategy – buying a real estate asset and holding it for the cashflow. Investment not intended for flipping or selling for an immediate gain.
Comps or Comparables – properties of a similar size, condition, and area to the investment in question. It is a common method in valuation as assets with similar characteristics should be priced similarly.
FHOG – First Home Ownership Grant. A government incentive that is aimed to a those that are purchasing a home for the first time.
Flip – buying and selling a property in quick succession. Usually if a transaction is profitable it is called a flip.
Fair Market Value – what the market thinks the property is worth
Lease Option – The owner offers the buyer an offer to buy the property at a preset price. They place a deposit and then rent from you. At or before the option term, they can choose to buy. If they choose not to buy, the owner keep the deposit.
OTP, Off the Plan – Buying a property sigh unseen as it is not yet build. The key decision factor is the plans for the building and known location. Settlement occurs when it is constructed.
Cashflow – The income stream from a property. Key reason buying real estate. If the building is tenanted, then the income is regular and predictable.
Captial Gain/Loss – This is the increase/decrease in price. It lump and less predictable. Unrealized capital gain is when the property is valued higher than previous book value. Same with losses. It becomes realized when the real estate is sold which makes it unpredictable as it only become realized when there is a sale transaction.
Debt To Service Ratio – How much of the income are multiple of the interest cost
Equity – the value of property for the investor after repayment of loans
IRR: Internal Rate of Return – a measurement of investment return based on frequency of cashflow
IO or I/O: Interest Only on a loan where investors only pay the interest on the principal every month. There is no principal or the amortization payment.
LMI: Lenders Mortgage Insurance, insurance for the banks against the borrower default. Usually required for high LVR loans. Note it is not to protect the borrow but the bank. The LMI premium is a one time payment.
LOC: Line Of Credit – A loan that is like a credit card. Secured against a property with a preset limit. Interest only structure based on the current outstanding balance.
LVR: Loan To Value Ratio, The size of the loan over the value of the property. $50,000 loan secured against $100,000 property equals a LVR of 50%.
P&I: Principle & Interest. A loan, each month the borrow pays a fixed payment which includes an interest and principal amount. At the end of the loan term, the borrower owes zero.
Return on investment: the investor return on the money put in the deal.
Cross-collateralise, cross-collateralisation, cross-collateralised. When the bank uses multiple properties as security for one loan.