Key Terms for Real Estate Investing

Before you head out to buy your first property, there’s some important terms and concepts to familiarize yourself with.

Equity is the amount of ownership you have in the property. If you purchased a house with 20% down and took a mortgage for the rest, your ownership equity would be 20% initially. As you pay off the mortgage, your equity share goes up.

Cash Flow is how much money a property is generating after expenses, calculated on a monthly basis. This includes things like rent from your tenants. Be sure to include any bills and interest on loans used to purchase or update the property.

Cost of Capital is what it costs you to borrow money, your interest rate. This needs to be accounted for when calculating ROI and Cash Flow.

Return on Investment, or ROI, is how much you made on a property from when you purchased it to when you sold it. This is the net total, after all expenses.

Another important figure is Annualized Returns. This is the percent increase in value over a specific time period. Since investing tends to lack consistency for returns, calculating annualized return on investment is a good metric for measuring how well your investments are performing relative to a benchmark, like inflation or interest in a savings account.

Cash-on-Cash is a ratio to calculate how much interest you’re receiving on your Cash Flow to the total amount of cash invested, excluding debt.

Capitalization Rate, or Cap Rate, is used to determine how profitable an investment is over a specified time period, usually one year. This is mostly used by investors in commercial properties as a comparison to a benchmark, like U.S. Treasuries.

Understanding these terms and concepts will help you better assess the properties you invest in, both for viability and performance. Next, we will look at the various asset classes and strategies for getting started in real estate investing.

Patrick McGregor

Patrick McGregor

Patrick McGregor is a senior writer covering the real estate industry and overall economic trends in the United States for several Yardi product publications. He also holds an MBA from Thunderbird School of Global Management. Patrick was previously a commercial real estate analyst at Yardi Matrix for five years. His work has appeared in the New York Times, Bisnow, GlobeSt, The Real Deal, Business Insider, The Denver Post, The Motley Fool, and more.