19 Beginner Real Estate Investing Terms That You Need To Know (To Not Look Like A Newbie!)

Does talking with other real estate investors make your head spin with all the terms you don’t know?

Make sure you avoid coming off as a noob by knowing these 19 beginner real estate investing terms that every investor should know.

Annual Percentage Rate (APR)

APR is used to determine how much interest you’re paying on a property loan.

After-Repair Value (ARV)

ARV is commonly thrown around by flippers. So this is how much a property is going to be worth after it has been fixed and put back in the market.

A property with a low ARV is not worth getting into the deal for. But having a too high ARV might raise your expectations too much.

Broker’s Price Opinion (BPO)

BPO is a very simplified appraisal. This is where a person just goes in and gives a best estimate of what a property is worth.

Bedroom and Bathroom Count (BR/BA)

BR/BA gives the count for the number of bedrooms and bathrooms in a property. For example, 3BR 2BA means that the house has 3 bedrooms and 2 bathrooms.

Capitalization Rate or Cap Rate

Commercial buildings are more difficult to make comparables for compared with single-family homes. So a cap rate is used instead because it’s how much the property is generating on a net profit scale divided by its purchase price.

Properties with a lower cap rate are the more expensive relative to the positive income you get from the property.

In San Francisco or other hot markets in Los Angeles, cap rates are really low around 2.5-4. But in the Midwest where properties aren’t valued as high, you’d see cap rates reach as high as 10-12.

Cash on Cash Return on Investment (COC ROI)

COC ROI is the net return you’d get based on the amount of money you put in. If you put in less money because you got a bigger loan, then your COC ROI will be higher.

Close of Escrow Date (COE DATE)

COE date determines when everything related to your closing in on a property needs to be done, and the money is exchanged hands and the property is turned over.

Usually once the buyer puts a property under contract, there’s a 30-day or even 40-day escrow period when the buyer is putting his affairs in order and getting his loan completed. The end of that period is what COE date is.

CUE date stands for close-up escrow date. I recommended that you schedule your CUE date on Monday or Thursday and not Fridays because it usually doesn’t end well on that day.

Debt Service Coverage Ratio (DSCR)

DSCR is how much the property generates divided by your PITI, which stands for principal, interest, taxes, and insurance.

Lenders use this metric to determine if a property’s income is able to sustain itself and pay for the mandatory expenses that come along with owning a property.

Most lenders want to see a DSCR above 1.15 or 1.25. If it’s below 1, then that means that the property is losing money and can’t even pay its own mortgage.

Letter of Intent (LOI)

An LOI is a softer version of an offer. An LOI does not put an obligation on you. It merely informs the seller that you are interested in purchasing the property for a certain amount.

An LOI can be a simple email or word document detailing the price you’re offering including some loose terms.

In the commercial space, you’d have to hire an attorney to write down everything and formally submit your offer.

Loan-to-Value (LTV)

This lending term states how much of the property’s value a lender is willing to pay on your behalf.

For example, an 80% LTV means that the lender would pay for 80% of the purchase price while you, the borrower, would have to pay for the 20% as down payment.

Net Operating Income (NOI)

You get your NOI when you subtract all your operating expenses except mortgage payments from your gross income.

Let’s say you own 20 units earning $1,000 each. So your gross income is $20,000. If your operating expenses for things like management fees and trash amounts to $5,000, then your NOI would be $15,000.

Purchase Agreement (PA)

Your PA or purchase agreement gives the details of your offer and what else you wrote down.

Principal, Interest, Taxes, and Insurance (PITI)

PITI is the mandatory payments you as a borrower are going to make no matter what. This is a fixed number that you’d always have to pay, and it is used in DSCR and debt-to-income (DTI) ratio calculations.

Debt-to-Income (DTI) Ratio

DTI is computed by your total debt divided by your income. Your total debt includes your PITI, any minimum car payments, student loan debt, or credit card debt. Your income is how much you make from your full-time job without subtracting the taxes.

Lenders typically want to see a DTI of 43 or below. Otherwise, they might not approve you for a loan.

Private Mortgage Insurance (PMI)

A PMI is the extra payment you as a borrower would have to make if you’re trying to get a loan with less than 20% down payment.

So if you’re aiming for a loan with 3.5% or 10% down payment, the lender would usually make you pay for PMI as a way to reduce their risk in case you default.

Points

Points or also known as origination fee is basically a charge for processing your loan.

If your lender says that loan’s going to cost you 1 point and the loan amount is $300,000, then you’d have to pay a fee of 1% of the loan amount, which is $3,000 as origination fee.

Purchase Price (PP)

This is pretty easy to understand. But most people use the abbreviation when writing the purchase price in emails. So they may write, “PP 350K”. This means your purchase price is $350,000.

Square Footage (SQFT)

Another self-explanatory term. This is used as a way to measure how big a house or a lot is.

In the Bay Area, houses tend to run between 1,000-2,000 square feet while lot sizes run between 3,000-7,000 square feet. Anything above or below that is considered as out of the normal range for a single-family home.

1% Rule

The 1% rule is a rule of thumb that states that if you want a property that cash flows from day one, then you need to buy a property whose monthly rent is 1% or more of the property’s value.

So let’s say your property is worth $100,000. Then every single month, your property should rent for $1,000 or more.

Now in the Bay Area, this is almost impossible to achieve. But if you look for properties upstate, you’d be able to find properties that meet the 1% rule even the 2% rule.

Conclusion

There you have it, the 19 real estate investing terms that would help you understand the lingo used in the industry and make you a better real estate investor.

If you want other investors to take you seriously, then it would be best to understand and use these common terms and abbreviations because knowing these is what separates the noobs from the pros.