22 Terms All Real Estate Investors Should Know

Key Takeaways

1. Know the Terms: Understanding real estate terms is key to making smart investment decisions.
2. Start with the Basics: Mastering fundamentals like ROI, cap rate, and cash flow builds a strong foundation.
3. Get Expert Help: Fall River Property Management offers local support to help you succeed.

Just like any industry, real estate comes with its own set of jargon and acronyms that can be overwhelming to newcomers. If you're considering investing in rental property, understanding these common terms is key to making informed decisions and communicating confidently with industry professionals.

From calculating ROI to navigating mortgage fees or setting the right rent, these terms show up in almost every step of the investment process. To help you get started, Fall River Property Management has put together a list of 23 essential real estate terms every investor should know—regardless of experience level.

Capitalization Rate

This is also known as cap rate. This is a ratio of an investment property’s net operating income to its purchase price. Knowing this ratio is particularly useful when comparing various properties for sale for maximum return on investment.

1% Rule

This method calculates the potential monthly rent amount based on a property’s value. If a property’s value is, say, $100,000, then the monthly rent should be about 1%, which is $1,000.

But, of course, you’ll need to factor in other things as well for a more granular figure. For example, the amenities the property comes with, the location, and the property’s features.

Down Payment

This is the amount of money that an investor puts up front when looking to buy a real estate property. It’s about 20 percent for a conventional mortgage.

1031 Exchange

This refers to a section in the US tax code. It allows investment property owners to exchange one investment for another and defer capital gains tax. There are certain conditions that the exchange must meet, however, to qualify for the tax exemption.

Capital Gains Tax

This is the tax the IRS requires property investors to pay on any profit they have generated after selling their property. The amount to pay depends on a variety of factors, including the ownership duration and the taxable income.

Cash Flow

This refers to the money you can expect to pocket from your investment after having paid all the expenses, such as mortgage and repairs. It can either be positive or negative.

If positive, it means that the investment is generating a profit every month. But, when cash flow is negative, it means that you’re losing money.

Acquisition Cost

This is the cost of acquiring a real estate property. The cost includes the mortgage cost (if financing it through a loan), closing costs, inspection fees, and agent commissions, among others.

Fix and Flip

This is also referred to as flipping. It’s a strategy that some real estate investors use for short-term profits. It involves renovating a property and selling it to a buyer. The money you make is the difference between the cost of renovations and the selling price.

Mortgage

A mortgage is a loan from a financial institution used to buy real estate. The property acts as collateral, and the borrower repays the loan in monthly installments with interest.

Passive Income

Passive income is money earned from a rental property with little ongoing effort. It’s a key benefit of real estate investing, especially when managed by professionals.’

Property Management

This refers to how the day-to-day tasks of a real estate property are handled. There are usually two ways of going about it. That is, either the owner managing it themselves or hires a property management company.

Closing Costs

These are part of a property’s acquisition costs. They are the extra costs you’ll need to pay in addition to the property’s purchase price. They include: insurance, underwriting fee, origination fee, and title search.

Amortization

This shows how much of the mortgage payment is going towards interest payment and what portion is going towards the principal amount.

During the first few years of paying a mortgage loan, most of the payments one makes go towards interest payments. And as the payments continue, more of the monthly payments go towards the principal.

Depreciation

This is one of the tax deductions available to investment property owners. It allows a property investor to deduct the cost of obtaining and improving a piece of real estate property. This is usually 27.5 years for residential properties.

Hard-Money Lender

This is a private lender that provides real estate investors with short-term loans meant for property acquisition. Investors who seek this type of financing often don’t qualify for conventional mortgage loans.

Apartment

This is a room or a set of rooms within a residential building that is usually fitted with essential utilities.

Diversification

This refers to the distribution of investment capital across different markets and property classes. The goal is to minimize risk and maximize long-term profit.

Appraisal

This is an objective valuation of a home’s value by a certified professional. The appraisal is done by estimating the value of a home based on the value of other homes within the community. An appraisal is one of the requirements needed for one to qualify for a mortgage loan.

Investment Property

This is a type of property meant to generate a recurring income. Examples include short-term and long-term rentals.

Appreciation

This is the increase in value of a real estate property over time. It can either be natural or forced. Natural appreciation occurs as a result of market forces, such as inflation and forces of supply and demand. Forced appreciation occurs when a property owner makes intentional efforts to upgrade the property.

Buyer’s Market

This is where the supply of homes is higher than the demand from buyers. In such a market, the prices of homes are usually lower, and bidding wars are rare, making it favorable for buyers to buy homes.

Seller’s Market

This is the opposite of a buyer’s market. The demand for homes exceeds the available supply, giving sellers a significant advantage. And where demand is high and supply is low, the prices are usually higher.

Conclusion

This list covers some of the most important and commonly used terms you’ll encounter as a real estate investor. Whether you're new to investing or simply brushing up, knowing these terms can help you make smarter decisions and communicate more effectively.

Fall River Property Management is here to support you every step of the way. As a trusted, full-service property management company serving Fall River and New Bedford, we offer the experience and local expertise you need to succeed. Reach out today to learn how we can help you get the most from your rental investment.