Real estate can be a great long-term investment, but it’s not for everyone. To make the most of your real estate investments and avoid costly mistakes, it’s important to understand key terms like ROI and leverage. This blog is a compilation of 5 basic terms as quoted by Someshwar Srivastava a renowned property investor and blogger.
Let’s jump into the blog to know about these crucial terms in detail which will allow you to make good investments in the real-estate business.
Return on Investment (ROI)
ROI is important because it tells you how much profit you’re making on your investment. To calculate ROI, divide the total gain by the total cost. So, if you bought a property for 100,000/- and sold it six months later for 110,000/- your ROI would be (110/100) * 100 = 10%.
The advantage of using ROI is that it can help measure performance against other investments in the same field over time so that investors know whether they are doing better or worse than average under certain circumstances. If these properties underperformed compared to others with similar characteristics, then this might indicate something was wrong with them such as poor maintenance or location issues which would require remedial action before moving forward with further purchases.
Equity is the difference between what a property is worth and what you owe, or the amount of money you would have if you sold your property. A positive equity is when your equity is greater than zero; in other words, when your home has a higher market value than what you owe. This can happen when homeowners have paid off some of their mortgages or have built up positive cash flow on their properties.
In contrast, negative equity means that the homeowner owes more on his/her mortgage than his/her home’s current market value—if this happens to be true for an investor who buys an investment property and hopes to sell it at some point as part of an exit strategy like Airbnb or short-term vacation rentals (STVRs).
Cash flow is a simple concept: it’s the amount of money that a property generates. If you’ve ever had to pay rent for an apartment, you know how important cash flow can be.
Cash flow is the difference between revenue and expenses—it’s positive when revenue exceeds expenses, which sounds like a good thing! When you’re working with real estate investing and mortgages, however, negative cash flow means that your monthly payments (mostly interest) outweigh your monthly income from rent in that property. You still have to make payments on this property even though it isn’t producing any profit for you (yet).
You need to understand how cash flow works before making any big decisions or investments in real estate.
Leverage is the amount of money you borrow to buy a property. The higher your leverage, the more risk you are taking with your investment. In many cases, this can be beneficial as it allows you to make larger purchases without having to come up with all of the cash upfronts.
For example: let’s say that you want to buy a 400k property but don’t have enough cash on hand for the purchase price. Instead of waiting until you’ve saved enough money from working and living off of savings alone, leveraging enables it you to use other people’s money (the bank or investors) so that he/she can make larger investments sooner rather than later—without sacrificing any equity in return!
Appreciation is the increase in value of an asset over time. It’s the difference between what you paid for the property and what it is worth today. Appreciation can be good, if not great, way to make money if your investment property appreciates over time.
If you purchase a house at 300k (and remember that every market is different), and two years later it sells at 400k, then there was an appreciation of 20%. This means that your original investment returned 100% after 2 years (due to no maintenance costs).
There are many other terms and concepts that may be helpful to know as well, but these are the ones that we think are most important. We hope you’ve enjoyed our list of five important property business terms, and that it helps answer any questions about investing in real estate!