If you are in the real estate investing arena or you would like to be, there are certain real estate investing terms that you must understand if you want to be successful.
Every business trade has it’s own lingo or terminology. In order to speak knowledgeably on a given trade it is very important to be familiar with the most used terms.
In this post I am going to go over 8 of the most commonly used terms by real estate investors. If you are not familiar with these already it would be wise to get at least a basic grasp on what each of them are.
ARV- After Repaired Value
After repaired value is the value of a given property after it is completely fixed up. This is really the most a property should sell for once it is looking new again.
This is a very important term especially for Fix and Flippers and Wholesalers. In order to come up with an offer, when using one of these strategies, you must know what the ARV is.
The best way to determine the ARV on a given property is to look at what similar homes have sold for in the same area within the last 90 days.
Pay closest attention on the sale price of the homes that were completely fixed up to get the best idea on it’s ARV.
MAO- Maximum Allowable Offer
Maximum allowable offer is the absolute most you can offer on a property and still make the return that you are looking for.
One of the most common mistakes real estate investors make is paying too much for a property. This done too many times can put an end to your real estate investing career real quick.
Before you ever make an offer on a property you should have a solid idea of your MAO and make sure that you stick to your guns. When you start fudging the MAO you came up with, you are increasing your risk greatly.
There are a variety of different ways to arrive at an MAO and this really depends on the investment strategy you are focused on and how much of a return you are seeking.
A common way to calculate MAO when you are looking to flip a property is to first determine the ARV. Next, subtract all expenses you will incur such as repair costs, closing costs, commissions and holding costs from the ARV. Lastly, you must factor in the return you want to make and subtract that as well to arrive at your MAO.
ROI- Return on Investment
Before moving forward on any real estate investment you should have a solid grasp on the return that you are seeking.
ROI is the amount of money that you are going to make on a real estate investment.
To calculate ROI, the net profit of an investment is divided by the amount of money invested, and the results are expressed as a percentage or ratio.
Here is one example of ROI calculated. If you purchased a house for $100,000 and immediately sold it to someone else for $120,000 your return on investment would be 20%.
ROI’s can be used when you are comparing different properties to see which one is the better investment.
Equity is the difference in the amount that is owed on a property and how much the property is worth.
It is the amount an owner would receive after selling a property and paying off the mortgage, minus any closing costs, commissions, taxes, etc.
The amount of equity in a property can increase in a few different ways. It can increase by the paying down of the mortgage.
The value of a property may increase when the market is going up which increases equity.
Lastly the amount of equity can increase when a properties’ condition or income is improved making it more valuable.
You should now have a good idea of what these 4 commonly used real estate investing terms are.
Remember to continually expand your real estate investing vocabulary so that you can speak knowledgeably with other real estate investing professionals and sellers using the most common terminology.
I hope that this post was very helpful to you. If it was, please share with someone who you think may benefit from it.
Here’s to your success!!!