Terms Every Real Estate Agent Should Know

Just like any other type of business niche, the world of real estate investing has its own language. While having working knowledge can help you get by, it’s far better to understand the most important terms, especially when it comes to investing large sums of money into real estate.

When it comes to real estate, knowledge is power. It’s this power that can give you the upper hand when trying to seal the deal. So, whether you’re new to this arena or are just trying to brush up on real estate lingo, here are five terms you need to know like the back of your hand.

Real Estate Pro Forma

Also known as property pro forma, this tool is one every investor needs to understand. When choosing a property to invest in, you need to determine whether it’s a worthwhile investment. Using a proforma tool, you can effectively gauge whether the property is a worthwhile investment, in addition to determining how much it’ll cost to acquire, maintain and subsequently resell the property.

It’s important to note that proforma is also based on experience as well as figures from similar properties and leading industry data. When used correctly, it can help you make educated decisions about whether the property you’re invested in will yield the return you’re hoping for.

Cash Flow

This term is pretty cut and dry, yet not everyone understands the importance of it. Cash flow describes the money that goes in and out of a property. If you have a rental property that brings in $2,000 a month but the total monthly expenses, including mortgage, gas, and electric total $1400, your cash flow would be $700. That’s the difference between the two figures, and that’s what you would consider a profit. If the cost of gas and electricity increases, or you rent the space for less, then your cash flow would decrease.

Loan-to-Value

While the term might sound complex, it’s only the measure of how much money you’re borrowing compared to the market value of the space. Say you purchase a home for $800,000 with a down payment of 20 percent. The LTV would be 80%. To calculate the LTV ratio, you need to know that it’s based on the actual purchase price and not the amount you paid.

Cap Rate

When you want to discuss and compare the profitability of properties, you use the cap rate. The capitalization rate (cap) is calculated by dividing the NOI (net operating income) by the value or sale price. The cap rate is how you measure the ROI. It can be used to determine if the investment is lucrative or not.

Buyer’s and Seller’s Market

These two terms are easy to understand, yet when trying to grow a successful real estate business a lot of new investors don’t make the most of either. When it’s a buyer’s market, it means the market is favoring those looking to buy. On the other hand, when it’s a seller’s market, it means that those looking to sell their property need to act fast because there are more people currently looking to make a purchasing decision.

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