The Most Essential Terms To Know Before Investing In Properties- Part I
Every area has its jargon, which may be unfamiliar to those who are not interested in the field or are only beginning to become interested. This is called terminology. For example, "abrasion resistance" is an engineering term you are unlikely to know and use in your daily life if you are not an engineer. Likewise, real estate investment has its terminology you might not have heard before.
As in many areas, in the real estate area, acting without knowing some terms may cause you to make wrong decisions and complicate things. Don’t let long and fancy words intimidate you; just take a look at our glossary of terms that you are most likely to encounter in your real estate investment journey.
- Real estate investing is a broad field and has a terminology of its own.
- There are terms that the average person knows or can guess the meaning of. But there are also other terms that you are unlikely to know if you’re not interested in investing.
- There are situations in which you need to be familiar with the meanings of these terms in order to be aware of what you are doing and to avoid missteps.
- Every investor should know the terms below in order to be a successful property investor.
Annual Percentage Rate (APR)
The annual percentage rate is a common term used to calculate interest on investment products. APR includes all costs of a loan to finance investment such as interest rate and broker fees. In other words, it is a percentage that reflects how much money you will spend annually on borrowed money for investment.
The term “interest rate” should not be confused with APR. Interest rate is a more generic term that you are more likely to encounter in your daily life. However, it only represents the price you pay for taking a loan and does not include other fees that are included in the annual percentage rate. On the other hand, APR includes the interest rate, but also takes into account other fees and allows you to make more comprehensive and long-term plans compared to the interest rate, which can be calculated on a daily or monthly basis.
How Is APR Relevant To You As An Investor?
When applying for a loan, APR helps you compare loan options and choose the best among lenders. Knowing the APR allows you to compare loans based on more than just the overall cost, as the APR emphasizes the true cost of a loan. It also allows you to compare the benefits of the loan options that you’re in between. So, if you are going to borrow money for an investment it is very important to know what the APR is.
A property that is created or purchased with the intention of producing income is referred to as an income property. They are also called “income generating properties”. One type of income property is a residential unit rented out to tenants. Through renting out or otherwise leasing out the property, the investor generates revenue. Considering that investing in income-generating properties is a secure form of investment and an alternative to investing in stocks, bonds, or foreign exchange, it is not surprising that many people choose to run their money doing so.
Escrow is a third party that keeps funds, documents, or money until the parties to an agreement meet the terms. In real estate terms, the money that is transferred as the payment of a property by the buyer is held in an escrow account and not directly transferred to the selling party’s account until all the terms of the agreement are done.
Today, escrow is used in online transactions, stock market, real estate and so on. In Turkey, though, escrow in real estate is not very common. However, in Propline, escrow accounts are used for financial transactions and your money is always safe.
Appraisal is the process of estimating the value of a real estate property. An average home appraisal works like this: An appraiser makes a report based on an on-site inspection considering factors such as the sale prices of similar projects, market trends, and other physical features of the property.
Why Is Appraisal Necessary?
Both the buyer and the seller need to see an appraisal report. The seller needs to see the appraisal report in order to set a price for his property, and the buyer needs to know how much the property is worth in order to determine how much loan they need to borrow. The buyer is usually the one who covers the appraisal cost.
Turnkey properties are real estate units such as single homes or apartments buildings which are ready to move in instantly or rent out. This kind of investment has some advantages. First, you don’t have to worry about renovating the property, fixing it, decorating it, all the things that you would have to do in order to increase its value. And, these processes cost you not only time and energy but also funds. Renovation is not cheap, so buying a turnkey property would save you some money. Plus, you can immediately rent out the property since it’s a fully functioning house.
Earnest Money Deposit
The earnest money deposit is the amount you pay to the seller to demonstrate your intention to purchase the property. After the seller accepts your offer, the deposit is not repaid to you. The deposit is only refunded if the agreement is broken because one or more of the terms of the sales contract are not met. The amount of the earnest money deposit can range anywhere from one to ten percent of the total sales price, — usually dependent on the level of market interest.
Earnest money is paid upon a contract between the buyer and seller. The contract does not dictate the buyer to purchase, but removes the property from the market while it’s appraised and valued. Earnest money is paid as a token of good will in this critical timeframe when the property is removed from the market but not sold yet.