Good morning and welcome to the final episode of Grant Teach Me Something for the year. Today, let’s go back to the basics and cover some essential acronyms and terms that real estate investors often use. Whether you’re a seasoned investor or just starting, having a clear understanding of these terms can be a game-changer.
A lot of times, we assume everyone knows what certain acronyms mean. But reality kicks in when someone tells us they didn’t understand half the things we talked about. If you’ve ever felt lost in this jargon, you’re in the right place.
ARV – After Repair Value
ARV stands for After Repair Value. This is the value of a property after all the necessary repairs and upgrades are completed. For instance, if you buy a house for $70,000, spend $10,000 on repairs, and the market value reaches $100,000, then $100,000 is your ARV.
To find the ARV, we check “comps” or comparables. These are similar properties in the same area. You want to see what type of finishes those properties have (like hardwood floors and granite countertops) to determine what your property can potentially be worth.
Basis
Basis refers to your total investment in a property. For example, if you buy a house for $70,000 and spend $10,000 on repairs, your basis is $80,000. This term is crucial as it helps you understand your investment’s total outlay and potential return.
Points and LTV – Loan to Value
When borrowing money, especially from hard money lenders, you might come across points and LTV.
- Points: A point is 1% of the loan amount. So, if you have a $100,000 loan with two points, you’ll pay $2,000 upfront.
- LTV (Loan to Value): This is the ratio of your loan amount to the appraised value of the property. For example, if your loan is $75,000 and the property is worth $100,000, your LTV is 75%.
Comps
“Comps” stands for comparables. These are similar properties in the same market area that have been sold recently. By analyzing comps, you can estimate your property’s ARV. For example, if similar homes in your area with similar features and conditions are selling for $100,000, that’s a strong indicator of your property’s ARV.
Amortization and ARM – Adjustable Rate Mortgage
- Amortization: This is the process of spreading out a loan into fixed payments over time.
- ARM (Adjustable Rate Mortgage): Unlike fixed-rate mortgages, ARMs have interest rates that change periodically based on a specific index. For example, a 5/1 ARM has a fixed rate for five years, then adjusts annually.
Maximum Allowable Offer (MAO)
MAO is the highest price you can offer on a property to ensure profitability. To determine your MAO, calculate 75% of the ARV, then subtract repair costs. For example, if your ARV is $100,000 and repairs are $15,000, your MAO would be $60,000.
Cash-on-Cash Return vs. Return on Investment (ROI)
Understanding these two metrics is crucial.
- Cash-on-Cash Return: Measures the return on the actual cash invested. If you invest $20,000 and earn $4,000 annually, your cash-on-cash return is 20%.
- ROI (Return on Investment): Measures the total return on the investment, including borrowed funds.
For example, if your total investment is $100,000 and you earn $10,000, your ROI is 10%.
Title and Deed
- Title: When you say you have the title, it means you have legal ownership of the property.
- Deed: A deed is a legal document that transfers property ownership from one party to another.
Wrap-up
Understanding the key acronyms and terms in real estate investing is essential for making informed decisions and achieving success in the industry. Whether it’s determining the ARV to ensure a profitable deal, calculating the basis for investment analysis, or understanding loan terms like points and LTV, these concepts form the backbone of real estate investing knowledge.
By familiarizing yourself with terms such as comps, amortization, and MAO, you can navigate the market more confidently and make better investment choices. Keep this guide handy as a reference, and continue to build your expertise in real estate investing. Here’s to your success in the coming year and beyond!
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