Looking to purchase a property? Here are ten terms you want to know and must understand if you want to make the right purchase.
1. Cash Flow
To invest in real estate, you want to have cash flow! This is your income minus expenses. Income includes rental income. Expenses can be mortgage, taxes, insurance, water, repairs etc. For example. You have a property bringing in 3000 a month. Your expenses equal 2700 a month. You have a cash flow of 300 per month. You can increase your cash flow by increasing income and decreasing expenses.
Your property has increased value over time! Typically properties can appreciate which is a major benefit of home ownership. For example you buy a property at 100k. In 5 years it is worth 125k. The property increased in value 25k!
3. Net Worth
This is your assets (what you own)- liability (mortgage, owed to someone else). Assets have value. Examples include real estate, cash, or jewelry. A liability is owed to another person. Examples include credit card, student loans, mortgage or personal loans. Your goals should be to increase your assets and decrease your liabilities.
4. DTI- Debt to Income
One way lenders measure your ability to manage monthly payments and repay debts. To do this divide your total debt and divide it by your income. For example, if your debt is 2000 a month and your monthly income equals 5000, your DTI is 2000/5000 or 40 percent. The lower your DTI, the less risky you are to lenders.
Term showing value- debt. Example a you own a house worth 100k. You owe 90k. You have 10% equity in the property. The value of the property can rise over time (appreciation) while you pay down the mortgage.
6. LTV- Loan to Value
Term used by lenders to express the ratio of value to asset. For example, you are taking on a 96,500 mortgage to purchase a home appraised at 100,000, you would have a LTV ratio of 95.5% (96,500/100,000). You would have 3.5% equity in the property.
A claim against your property. Example you have a mortgage of 300k. Your obligation is to pay down your debt. If you don't satisfy paying your monthly payment, the bank can seize your property. If you pay down your debt over time, you will have no mortgage and own the property fee and clear.
Shows ownership. Used to convey real property from a seller to a buyer. This is a signed legal document.
A bank or creditor lets you borrow (lend) the money at an interest rate. The mortgage becomes void upon payment of the debt. For residential real estate, this can be a 30 year fixed. A mortgage is a lien on property.
You can hold the property in an LLC. It is a limited liability company. An LLC can protect you against financial claims. An individual making a claim against you can only go after the assets of the LLC.
With a better understanding of these terms, you are ready to purchase real estate! Hopefully this is helpful, please share if you enjoyed the article!