Terms you Must know In Real Estate Investing
Summary:Once you get involved in Investing in Real Estate, there will be certain lingo that you will hear quite often that you must become familiar with.
Residential real estate: Residential real estate consists of single-family homes, townhouses, condominiums, and multifamily homes that people use as a living space and not a working space. Homes larger than four units are considered commercial property. Examples include freestanding homes, townhouses, and condominiums that occupants can own.
- Commercial real estate: Commercial real estate is a property that is used for the purpose of business. A commercial real estate is classified as an office, retail, land or multifamily. Specific examples of commercial real estate properties include business offices (office), restaurants (retail), farmland (land), and large apartment buildings (multifamily).
- Industrial real estate: These properties serve an industrial business purpose. Some examples include shipping or storage warehouses, factories, and power plants.
In addition to property types, there are three main ways to make money from real estate investments: interest from loans, appreciation, and rent.
- Interest from Loans (or, in the parlance of real estate, “debt”): A real estate loan is an arrangement where investors lend money to a real estate developer and earn money from interest on the loan principal. Debt investing provides an investor with regular cash flow. Depending on the number of lenders, there can be one or several types of debt within the capital stack of the investment. Types of debt include senior debt, junior debt, and mezzanine debt. Debt can also be secured or unsecured, which define an investor’s rights in the case of a property’s foreclosure. A loan is a passive investment that is used by private equity firms,
- REITs and real estate investment platforms.
- Appreciation: As with the ownership of any equity, real estate ownership gives an investor the option to earn money from the sale of that equity. The appreciation, or increase in value of a property over time, represents the potential profit available to an investor when that property is sold. Unlike debt investment or rental income, a sale provides a large, one-time payment. Depending on the number of owners of a property, equity can be categorized as preferred equity or common equity. Equity ownership can be an active or passive investment depending on the position of the investment in the capital stack.
- Rent: The owner of a property can earn income by leasing that property. As with the income generated from a debt investment, rental income can provide a regular income stream. Depending on how property owners manage their real estate (independently or through a hired manager), they may keep their earnings or share it with a property management company.