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Real Estate Terms Every Investor Should Know

There are about a dozen real estate terms an investor should know for each letter of the alphabet from the letters A to W, nothing that I can think of for X, Y, or Z.  These are the terms I felt were important to share and some insider strategies, notes, advice, and examples.

1031 Exchange is the IRS code’s Section 1031 makes it possible for a real estate investor to defer payment of capital gains taxes on an investment property upon its sale, as long as another “like-kind” property is bought with the profit from the sale of the investment property. By the way, Joe Biden has said he will be abolishing the 1031 Exchange. 

Absentee Landlord refers to a landlord that owns and rents out a property to earn profit and does not live on the property or in the local economic region.

An appraiser is an unbiased professional that is contracted during the escrow or refinance process to assess the value of the property in question.

ARV is a term meaning the estimates of the future value of the property after renovations and any repairs that are made to the property. This is not the value of the property at purchase but following the improvements that are made to the property and is an estimation, not a guarantee, based on what comparable properties have recently sold for.

Bank Owned Property is one that is taken back into a bank’s inventory after the owner defaults on the mortgage loan. This type of property is likely to be sold at a discounted price or lower than other comparable properties in the same location.

A home equity line of credit (HELOC) is when a property owner borrows money against the equity that has been built up in the said property.  I created a separate video on this subject with more specifics on how to use it as leverage even if you don’t own any property now, and you can find the link to it in the comments section below.

Leverage is the use of various financial instruments or borrowed capital—in other words, debt—to increase the potential return of an investment. It commonly used when talking about the real estate market.

LTV is short for the loan-to-value ratio and is a financial term used by lenders to express the ratio of a loan to the value of an asset purchased. Basically, what is the loan amount versus the market value of the property being leveraged. 

Market value is the price an asset would fetch in the marketplace.

A property manager is an individual or a company that is hired by a property owner in order to run the rental property. Typically property owners will hire a property management company to run it because they are unwilling, don’t have the time to do so, or are absentee landlords.

Qualified Opportunity Fund is defined as an opportunity fund as an investment vehicle designed to invest in real estate or business development in areas known as “opportunity zones.” Opportunity zones are particular geographic areas that have been designated as economically distressed. As a result, these areas may be subject to different economic regulations than other regions in the country or state. Tax incentives for investments in opportunity zones include delayed and potentially reduced taxes on capital gains. Beyond the ability to defer taxation of previous gains, the longer a participant holds their qualified opportunity fund investment, the smaller their tax burden may be.

* If held for longer than five years, investors receive a 10% exclusion of the deferred gain on their investment. 

* If an investor holds for more than seven years, they receive a 15% exclusion. 

* After ten years, the investor does not owe federal income taxes on the fund’s appreciation by the date of sale.

What are Negative and Positive Cash Flow Properties?

* Negative Cash Flow means the opposite of Positive Cash Flow and so what positive cash flow means is that when a property is cash flow positive that it allows the property owner to pull money out, even if it’s one penny more, monthly assuming a normal and typical month with a longstanding renter making their payments in full and no unusual costs out of the typical monthly budget has occurred and also assumed the 20% to 25% down payment was made to secure the property with the bank when a mortgage was taken out on the property.

What is a Hard and Soft Money Lender? How does it work? How long does it take together funding? Getting millions of dollars for loans to buy property is easier than you think and can be acquired in as little as 3 days. 

* A hard money lender and even a soft money lender is actually easy to acquire, and I can tell you after using a hard money lender myself on one deal was relatively easy to do and I had the money in literally 5 days the first time.  Now the cost of money to borrow was high and monthly was high and this is never intended to hold the property for more than 4 to 6 months with these types of lenders.  These guys are best for a quick fix, flip and sell situation.  In my case, the numbers still worked when I started and had to pay $20k out of pocket for the loan and the amount at the time was $500,000 or a 2.5% fee and then the loan amount that had to be paid monthly was at a 15% rate, yes, very expensive.  That’s why the best choice is for a soft money lender because if you can find a private investor who doesn’t lend as a business like the hard money lender, you can get way better rates and usually don’t have to pay anything for the access to the money like I did with the 2.5% fee. I cover this a bit also in the HELOC video linked in the comments below.

Benefits of owning rental property:

  1. Can be used as leverage to buy more assets
  2. Gives you tax benefits
  3. Provides passive income
  4. Can be passed down creating generational wealth
  5. Provides monthly cash flow to pay for liabilities 
  6. Property appreciation over time but remember to buy a property based on cash flow
  7. If mortgaged (and it’s positive cash flowing) your renter pays the standard monthly bills
  8. Freedom when also diversified with a great retirement plan in guaranteed growth investments

House Hacking in Real Estate Investing:

  • What is the BRRRR method?
    • BRRRR stands for Buy, Rehab, Rent, Refinance, Repeat, and Google defines it this way, it’s used in real estate investing. When done right, you could earn a hefty return on your real estate investment within a few short months, helping you quickly build up a decent passive income.
    • You can’t really do the BRRRR method here in the San Francisco Bay Area that I have seen work all that great as I have seen it work outside of California but it’s a great strategy if you have the flexibility in life to pull it off.  You can begin your BRRRR with a hard or soft money lender and refinance it to pay off your lender then maybe live in the unit for a couple of years to take advantage of the lower owner-occupied bank interest rates. 
  • Apartment Building Hack
    • For example a market outside of California you put 3.5% down on a $250k 4 unit apartment
      • You can live in one of the units and rent the other 3 for $1,900 a month
      • Tenants will then be paying the mortgage and you pocket $400 a month
      • Over time the tenants will have paid all the mortgage and you get to pocked all that money as future passive income for the rest of your life

These are a very fast overview of what you should know and of course for details you can reach out to me to learn more. In my next video, I will cover the risks or cons of owning rental properties. 

Feel free to comment below or send me a message from the website on the “Get in Touch” link at the top of that web page and please like and subscribe to the channel so that you don’t miss any future educational videos. I hope you found this video informational and learned a bunch of new things. I’m happy to help share more information if you reach out to me and I wish you all the best.

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