While we know that the real estate business is ever-changing, the terminology will most likely always stay the same. As an investor, you should be able to use and explain the common language used in the industry for both educational purposes and to ensure your investment is successful.
Common Real Estate Terms
This terminology is used in almost every real estate transaction.Familiarize yourself with these real estate terms before jumping into your first real estate transaction. Click To Tweet
Here is a brief summary of each definition.
- Loss Factor
- Cap Rate
- The Right of First Refusal
- Cash-on-Cash Return
- Net Operating Income
KPI stands for Key Performance Indicators. KPIs help measure the success rate in profits and where some areas may need improvement. In the real estate business, examples of KPIs are calculating commission margin, net profit, average amount of commission per sale, or the effectiveness of advertising and promotion of available properties. Tracking and measuring KPIs will help increase profit when effective strategies are implemented based on those measurements.
2) Loss Factor
The areas of your property that service more than one tenant may include the restrooms, lobby, custodial closets or elevators. This space is considered usable, not rentable space, and is otherwise known as your loss factor.
ProTip: To calculate the loss factor, find the percentage difference between rentable square feet (RSF) and usable square feet (USF). This is the percentage you will be responsible for paying.
3) Cap Rate
The cap rate is a common and useful ratio in the commercial real estate industry and it’s helpful in several scenarios. Essentially, the cap rate represents the percentage ROI an investor would receive on an all cash purchase. It takes the net operating income (NOI) divided by the property asset value.
4) The Right of First Refusal
The right of first refusal means that the seller gives the first potential buyer or interested party the right to buy the property before the seller considers any other interested buyers. There can be other interested buyers for the seller to consider, but they must first notify the original potential buyer, and that buyer can accept or refuse before the seller can accept an offer from someone else.
Escrow means that when someone puts a down payment on a home, there is a third party like a loan office or bank that holds onto that money in a separate bank account until final closing paperwork has been signed. Once the buyer and seller confirm all agreements are final, the money is released to the seller.
6) Cash-on-Cash Return
This term refers to the yearly return overall in relation to the amount of money you put down when buying a home. This number analyzes the investment you’re putting into the property. In other words, the cash that you have left over after one year divided by the cash you’ve invested will be the cash-on-cash return.
7) Net Operating Income
Net Operating Income measures a real estate company’s potential to be profitable. If you estimate the property’s revenue and subtract expenses like maintenance, repairs, property taxes, and HOA fees, you will get your net operating income.
Why Are These Terms Important to Know?
You want to educate yourself on these terms and more when investing in a property. This will help avoid any complications in the buying or selling process and help promote success in your investments.