Licensed professional who arranges transactions between buyers and sellers of interests in real estate. May also be referred to as brokers. Dual agents represent the buyer and the seller on the same transaction.
The number of months/years it will take an individual to pay off a mortgage e.g. 30 years.
Expert opinion expressed by a qualified professional, which reflects the value of a particular property.
A property market intermediary acting on his own interest, to connect buyers and sellers, investors and investments.
Buy and Hold
An investment approach where an investor acquires property and retains ownership over the long term as the property appreciates in value. The buy and hold approach aims to maximize on the capital growth of the property’s value e.g. investing $10,000 in a property whose value appreciates by 5% every year, for so many years.
Used often in reference to commercial property, this is the rate of return of an investment in the property. The cap rate is derived by from dividing the Net Operating Income by the Market Value of the subject property. It is the equivalent of rental yield for residential property.
The rate at which the value of a piece of real estate grows e.g. 10% growth year-on-year
An ROI metric used to evaluate the cash flow i.e. annual pre-tax cashflow, of income producing real estate. It is calculated by taking the annual cash flow of the property divided by the cash invested in the property. The metric allows a more precise appreciation of return on investment where leverage is used because it uses direct cash out of pocket, excluding debt. It is also known as the cash yield.
The final process in completing a real estate transaction. During this process the rights specified in the contract pass from one party to the other. A closing normally occurs when the parties to a transaction e.g. an acquisition or a commercial lease, sign the final transaction documents.
Fees or charges incurred by the parties to a real estate transaction during closing. Depending on the jurisdiction, they are normally charged set as a percent the transaction value within a negotiable range.
Commercial Real Estate
Property primarily designated for business purposes including office, retail, commercial, warehousing, hotel etc. In a general sense commercial property refers to any income producing property including residential apartments.
Payment due to a real estate agent or a broker due to services offered in aiding a client in the sale, purchase or lease of a property. It is usually set as a percentage of the transaction amount.
Comparative Properties (Comps)
A list of properties with similar characteristics and located in the same or a similar area as the property under consideration. Realtors and agents usually conduct a Comparative Market Analysis to determine the market value of a property.
When a buyer or broker enters into a sales/purchase contract with a motivated seller at a given price but sells the house to another buyer at a higher price, pocketing the difference. Contract flipping is different from house flipping.
Days on Market (DOM)
The DOM is the average number of Days properties are advertised for sale before they get a buyer.
A transaction entered into by two or more parties that involves the exchange of property or certain rights to property for so much money.
The process by which investors, business owners, agents or individuals identify potentially beneficial real estate deals. In practice, the process involves generating leads and managing relationships with market experts such as brokers in niche markets.
The legal and financial configuration of a real estate transaction. The structure of the deal dictates the legal and financial obligations, operational responsibilities, risks and rewards for each party. A common type of structure in real estate is a joint venture where two or more parties classified under the General Partners and the Limited Partners combine to complete a transaction. To learn about how to properly structure a joint venture deal, take this short course online or get a 10% discount on the course and any other here.
When negotiating a real estate deal, some or all the parties may experience exhaustion or frustration as a result of parties taking hardline positions. This may result into deals taking longer than expected or falling through.
Portions of the Gross Site Area which cannot be developed. They include access roads, lanes, electric lines, water lines etc.
Down Payment and Deposit
A down payment is the amount that a buyer has to pay in order to secure a mortgage from a lender who agrees to finance the balance of the purchase price. Lenders require a down payment because it helps to offset the lender’s risk. The down payment is usually greater that the deposit, which forms part of the down payment. A deposit is a money paid by the buyer to the seller to show that the buyer’s offer has been made in good faith and it serves as a proof of commitment by the buyer to close the deal. It is usually due within a day after the contract has been signed while the down payment is generally not due until completion.
A detailed fact-check about a property deal by the buyer to verify the information presented by the seller. During this period, the buyer undertakes to satisfy himself about the nature of the investment, the risks involved and the feasibility of doing the deal. A buyer is allowed to cancel the deal if they identify issues with the property during this period. Note that real estate transactions that are subjected to the due diligence process carry a higher chance of success.
The term escrow is regularly used in real estate deals to refer to independent third parties responsible for holding funds, documents or technically handling the transaction (escrow agents) until certain obligations agreed by all parties involved are met. For instance, the deposit is paid into an escrow account while the ownership documents can be held by an escrow agent…
Fix and Rent
Similar to process to home flipping except that in fix and rent, the investor lets out the property for rent instead of selling it for a profit.
The process of buying an investment property, renovating it and selling it out at a profit. House flipping can be a risky undertaking since it is knowledge intensive and although the practice is less pronounced in developing countries, in more developed economies it is big business.
Floor Space Ratio (FSR)
In real estate development, FSR refers to the size of a building relative to the size of the land. It is used by town or city planning authorities to control building density in an area
When an investor is forced to sell off an investment property following a breach in the agreement with their financier such as a mortgage or loan delinquency. It is often by means of a court order which allows a concerned party to dispose of the property at a public auction. Sometimes the aggrieved party may make a bid for the property, resulting in a bargain purchase.
Many real estate investments or development deals are structured as partnerships where you have the general partner and the limited partner. General partners usually own part of the investment and assume unlimited liability and management of the investment.
Gross Building Area
The sum of all built up space from wall to wall. It also includes some parts of the building that are not saleable.
Gross Lettable Area
This is the sum of all the space in a building, that is capable of occupation. It excludes areas such as parking, garages, patios which are part of the building.
Gross Site Area
Refers to the actual dimensions of the land or site earmarked for development i.e. how big the plot is. The gross site area often includes ‘Deductions’(portions of the land which cannot be developed due to regulations e.g. public access, lanes, sewer lines et cetera.
Home Purchase Plan
A device of Islamic finance, which allows buyers to purchase a home on an interest free loan. The lender, usually a bank, first acquires the property before selling to the prospective buyer. The buyer takes possession of after a down payment while the owner, the bank receives rent from the buyer for the duration of repaying the loaned amount, no interest on loan is charged.
Household income is the aggregate earnings of all household members. It includes all forms of income arising from employment, household enterprises, agricultural produce, rent, pension and financial investment.
The cost of money
Inflation refers to the rate of appreciation in the prices of goods and services in an economy. Inflation is significant because it determines whether consumers will have more or less disposable income to invest in other areas like real estate taking into account other factors such as interest rates and income growth. Inflation also determines how developers and sellers price real estate since this is based on the unit prices of individual inputs like cement and fuel. Real estate investments are considered a hedge against inflation since property values and rents generally increase following inflation.
Property meant to produce returns in cash yields or capital appreciation, or a combination of both based on the investor’s strategy. IP normally excludes the primary residence of the investor if they own it.
A change in the number of jobs created by an economy over a certain period, usually expressed as a percentage. Increases or decreases in jobs growth indicate the state of employment in an economy and in turn dictates the disposable income in the general population.
A joint venture is a business arrangement in which two or more parties agree to combine their resources in order to achieve a certain goal. In a Real Estate Joint Venture, the goal is the development of a real estate project. The joint venture agreement enables real estate operators (professionals who are experts in managing and developing real estate projects) to partner with real estate financiers (individuals or organizations that can provide the capital needed for a real estate project). Most real estate joint ventures consist of two separate entities: the operating member or general partner and the capital member or limited partner.
Financing used to acquire a piece of land without any cash inflows. As a result, the Loan to Value ratio for a land loan is usually lower, say 50%.
*Gross Lease; The gross lease is the most tenant-friendly lease type, because the rent is all-inclusive. Most, if not all, of the expenses associated with occupying the property are covered, such as utilities and janitorial services. These leases may also include property insurance and taxes, but these must be carefully negotiated. Additionally, landlords agreeing to these types of leases should consider exceptions for tenants that consume excessive power or otherwise unduly burden the all-inclusive aspect of the gross lease.
*Net Lease; Under a net lease, the tenant is responsible for some or all costs associated with the property such as utilities, maintenance, insurance, and other expenses. There are three types of net leases.
- Under a single net lease, the tenant pays rent plus property taxes.
- With a double net lease, the tenant pays rent plus property taxes and insurance.
- Through a triple net lease, the tenant pays for rent plus property taxes, insurance, and maintenance.
A contractual arrangement between a property owner and the tenant in which the owner agrees to transfer complete ownership of the property to the tenant after a specified period of time. In the meantime, the tenant continues to pay rent in the ordinary sense. Lease options are an alternative home ownership financing instrument.
The fixed period during a lease contract is in force. For property with a lease term, the shorter the lease period the more reason to avoid it. E.g. a property with a lease period of 25 years may require an expensive renegotiation of the lease contract after the period, or the property may revert back to the owner.
The gross building area from the construction, less all common spaces of the building and non-lettable areas like hall ways, corridors, patios etc.
The amount of borrowed money or debt that an investor employs towards and investment property, relative to the value of the property. The potential Returns on Investment (ROI) increases with higher leverage and so does the risk. Leverage is measured by the loan-to-value ratio.
The combined effect on the ROI, accruing from the ability to use debt in property acquisition added to the fact that real estate generally appreciates in value over time. For instance, if an investor is required to put down a 20% payment to receive a mortgage for investment property, he receives an 80 per cent discount on his capital. If the acquired property appreciates by 5% per year, the investor’s capital can be said to appreciate by
Limited Partner– In a partnership, the limited partners is a passive investor whose liability is limited to the amount invested in the property.
Loan to Value Ratio
The ratio of debt amount to the value of a property. A useful figure for investors who use leverage in real estate deals to keep an eye on. For example, a loan to value ratio of 0.6 implies that 60 per cent of the deal is financed by debt.
Geographical bearing of a property. Different locations offer different advantages and/or disadvantages. Location is one of the foremost factors that determine the value of an investment property.
Real estate markets are dynamic; hot markets turn cold and cold markets turn hot in cycles which can be tracked by analyzing trends. Local market psychology is the driver of all real estate markets. There is no ‘average market’, all local markets have different fundamentals even within the same city.
Information about real estate market fundamentals like price changes, sales volumes, capital growth, rental yields, demand outlook, cement consumption et cetera.
Maximum Gross Building Area
It is the maximum area that can be built based on the FSR allowed for the property by regulations. Depending on the developer, the actual building can occupy less than the Max. GBA but not more.
Construction Gross Building Area
The actual building area based on architectural drawings and construction plans by the developer.
A financial instrument employed in the acquisition of property, essentially a real estate loan.
Mortgage Backed Securities (MBS)
Tradeable asset-backed securities that are secured by mortgages. MBS allow investors to participate in the mortgage business on the secondary markets without taking or giving mortgage loans.
Net Site Area
The actual area of the land that can be developed. It is arrived at by taking the Gross Site Area less any Deductions.
Real Estate Financial Model
A financial decision-making tool that can be used to analyze and forecast the financial behaviour of a real estate investment. Microsoft Excel, is one of the most common ways to build a financial model for your real estate investment. To learn how to use Excel to build financial models, we recommend taking these courses or use this link to learn how to build a real estate financial model. You can find a 10% discount on all courses by using this referral link. Alternatively, you can contact us and get your business or real estate model done for you at a small fee.
A real estate investment trust (REIT) is an investment fund or security that invests in income-generating real estate. The fund is operated and owned by a company of shareholders who contribute money to invest in all sorts of income producing real estate including residential properties, commercial properties, industrial properties etc. In many jurisdictions, REITs receive special tax considerations and can be publicly traded on the stock exchange. REITs allow investors without the massive capital normally required to carry out real estate investments, to still participate in real estate investments.
An upward adjustment on the amount of rent payable by the tenant as a result of factors such as inflation, to cushion the investor from such factors beyond their control. Most lease documents for commercial property have a rent escalation clause which specifies the mechanism for escalating the rent.
The rental income calculated excluding operating expenses such as repairs and maintenance, property insurance, security, tax etc.
Total amount of rental income received from tenants before making any deductions such as expense.
In commercial property, base rent is the initial rent agreed in a lease or the minimum rent payable, that is subject to adjustments such as rent escalation charges, sales or other factors. In a lease document, the term Base Rent should be defined in the document.
The rental rate averaged out over the term of the lease after factoring in vacancy rates, incentives and concessions. It is the average amount of rent money due each year or month when averaged out over a period of time, typically your lease term. It is a good number for comparing lease alternatives when evaluating offers with varying lease rates, expenses and concessions.
Recreational Real Estate
Property meant for fun and outdoor activities such as get-aways, hiking, camping, fishing, riding, hunting etc., popular with nature lovers and outdoor enthusiasts. For investors, recreational real estate is another specialized niche and depending on the nature of the property, it may afford an operational advantage in comparison to rental or commercial property for instance.
The length of time that the interest rate for the mortgage is agreed for e.g. 5 years. Note that you may have a 20-year amortization rate for your mortgage and 5-year term on the interest rate agreement. That means at the end of 5 years when the term expires, you will have to agree a new interest rate with your lender.
The proportion of a rental property that is unoccupied during a given period, usually one year. Investors use this figure to estimate potential rental income and cash flows, to calculate vacancy allowance for tax deductions and to gauge local market conditions. Although vacancy rates vary depending on local market conditions, a low vacancy rate is preferable.
The amount of initial equity that has to be put in to fund the project since land loan does not cover all purchase and rezone costs. It is calculated as the difference between cash cost to purchase & rezone and amount of land loan.
Implied Equity Value
The implied value of equity based on the market price or appraised value of the property. It is calculated as the difference between appraised value and amount of land loan outstanding.
The valued gained by completing this project. It is calculated as the difference between appraised value and cash cost to purchase & rezone.
Occurs when a party enters into a contract with a seller to purchase property, markets the property in the contract to other potential buyers and assigns the contract to one of them. The wholesaler’s job is to sell the home to a potential buyer before the contract with the original owner/seller closes. The wholesaler’s profit is the spread between the original contract price and the price paid by the buyer.