If you’re new to real estate investing, you may be trying to find out all that you can about your new business endeavor. Although it’s easy for beginner real estate investors to get overwhelmed with all of the different investing terms that the pros use, it is essential to familiarize yourself with these terms to succeed in the business.
In this guide, we are breaking down the top real estate investing terms that all savvy investors should know. Keep reading for a break down of the most important, and what they mean.
CMA (Comparative Market Analysis)
A CMA (short for comparative market analysis) helps you determine the value of a property, by comparing it to similar properties within the same area. Real estate agents and investors often do this to find out the market value of a property. It is crucial when comparing properties to find the most similar in square footage, as well as the number of bedrooms and bathrooms, as this will give you the most accurate idea.
ARV (After Repair Value)
After repair value (ARV) is how much a property is worth after it has been repaired or improved. Investors often use this figure to determine how much money they can spend on fixing a house up. The ARV can fluctuate greatly, depending on the properties location, its condition, and also what you intend to use it for. For example, if you plan to rent the home out, you may choose to do as little work as possible work. However, if you plan to flip the home and sell it for profit, you may wish to spend more money fixing it up.
LTV (Loan to Value Ratio)
Loan-to-value (LTV) ratio is a very important term to know if you plan to finance the purchase of your home. LTV is a method of assessing risk for the lender. You can find the LTV by dividing the loan amount by the property value. It is important to know that the lower the LTV, the less risk to the lender, which often results in the best interest rates.
The net yield is a crucial figure when calculating the return of an investment. You can calculate the net yield by deducting all of the expenses you have incurred while owning the property from the gross annual income. This includes, but is not limited to, property taxes, management costs, insurance, and any improvement or maintenance.
The Capitalization rate, known colloquially as the “cap rate,” helps investors compare potential investments. The cap rate is calculated by taking the annual net operating income and dividing it by the purchase price. Typically, the higher the cap rate, the better the investment opportunity.
Although these terms are a great way to build on your knowledge of real estate investment, they are merely the tip of the iceberg. The real estate industry is full of terms and acronyms that every investor should know and understand. It’s important that when communicating with other investors, or negotiating a potential deal, you can effectively communicate in the real estate lingo other investors speak.