Top 7 Real Estate Investment Terms You Should Know
The better understanding you have of real estate investment terms, the easier it will be for you to succeed in the purchasing, building, renovating, selling, and renting of real estate for profit.
Whether you know these terms or not, it never hurts to refresh or expand your real estate knowledge. This short compendium serves to help investors navigate their way through a business deal, talk with lenders, and in the end get the best return on investment.
Loan-To-Cost (LTC)Ratio. This is a measure used by real estate professionals to compare the amount of a loan against the cost of a real estate investment. These costs include, but are not limited to, the cost to acquire and renovate an investment property. To calculate the LTC ratio, the loan amount is divided by the total cost as defined earlier. For example, let’s assume a $80,000 loan against a purchase of a $90,000 property that requires $10,000 of renovation. The LTC ratio would be 80%. Real estate lenders study the LTC ratio to determine risk, and a higher LTC indicates increased risk. In general, lenders finance up to 90% of a project, and ideally want borrowers to have some equity at stake, which encourages them to see the project through to completion.
Loan-To-Value (LTV) Ratio. The LTV ratio compares the total loan for the project against the value of the project after completion, or its current market value. In regard to an existing home, the LTV ratio is calculated by dividing the borrowed amount by the appraised value of the property, expressed in a percentage. For example, if a home is appraised at $100,000 and a $10,000 down payment is made, the amount borrowed is $90,000; the LTV ratio is 90% (90,000/100,000).
As-Is Loan-To-Value (AILTV) & After-Repair Loan-To-Value (ARLTV). When a property is a fix-and-flip, a lender may ask for two appraisal values: the current as-is value and the future after-repair value. These will be used to determine the AILTV and ARLTV ratios, which are used to calculate both risk and potential for profit. In the real estate flipping business, the after-repair value is the property’s value when renovations are completed and the property is ready to sell. It takes into account the total cost of repairs and the estimated value of the home.
Interest Rate. Interest rate can be simply defined as the cost of borrowing money. It’s the amount a lender charges on the amount of a loan. Lenders consider several factors when determining interest rates, such as the real estate property’s value, borrower’s credit history, type of loan, length of loan and other factors.
Debt Service Coverage Ratio (DSCR). This is a measure of an investment property’s cash flow and its ability to pay annual debt and expense obligations. It answers the question whether an investment property can generate enough revenue to repay current debt, including principal, interest, and expenses such as annual taxes and insurance. It’s also used as a measure of a borrower’s income against debt service.
Equity. In real estate, equity is the difference between the current market value of a property less any debts owed. If a property is worth $400,000 on the market and its outstanding mortgage or loan is $150,000, the equity is $350,000.
Bridge Loan. This short-term loan is often used to stabilize or acquire real estate until an investor’s planned exit strategy is achieved. Investors use it to swiftly close on an investment property that needs to be stabilized (either through renovations or placing tenants) before a planned exit strategy is met (which can be either a sale of the renovated property or refinance of the now cash-flowing property with a long-term loan). Bridge loans are generally between 12-24 months and carry interest-only payment where a balloon payment of the principal is due at maturity.
Ready, set, go!
With these terms under your belt, it will be easier to work your way through real estate transactions and build your portfolio of real estate investments. If you’re an investor looking for a transparent and fair loan that allows you to quickly acquire property, connect with the Haus Lending team at firstname.lastname@example.org or call us at 1-877-GO-4-HAUS to discuss your project and find the right loan.
*Rates advertised are the lowest offered. Actual rates and offers may vary based on approval criteria, including but not limited to borrower FICO score, previous experience, period of ownership, etc.
**Leverage advertised is the highest offered. Actual leverage and offers may vary based on approval criteria, including but not limited to borrower FICO score, previous experience, period of ownership, etc.
***At this time, we are unable to lend in Minnesota, North Dakota, South Dakota, Utah, Oregon and Vermont.
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