The Miami Real Estate Investment Terms You NEED To Know
If you’re looking to buy investment properties in Miami, there are bound to be a number of real estate investment terms that you will come across that you aren’t familiar with. In our latest post, we define some of the most commonly misunderstood terms for Miami real estate investors! Don’t buy your next Miami investment property without familiarizing yourself!
Misunderstanding just a few terms when making an investment can have huge impacts on your overall returns. Before making an investment in Miami investment properties, it’s important to know and fully understand the terms, acronyms, concepts, and expressions outlined below. The Miami real estate investors who know how to navigate the entire process – from buying to refinancing to selling – consistently post the biggest profits and the strong returns.
A 1031 exchange allows an investor to defer the capital gains taxes they could normally expect when selling a property for a profit. The 1031 exchange allows an investor to purchase a Miami investment property of like kind with the profits of the sale, without first incurring taxes. There are conditions to the exchange such as the property must be of “like kind.” That said, like-kind covers a wide array of properties.
Amortization is the process of paying off your loan each month. It calculates the percentage of the principal and interest you are paying as these amounts vary month to month. Your total payment will remain the same.
ARV refers to the “after repair value” of a property. It is not what the house is worth today but rather the potential value of a property once it has been fixed-up and restored. If you’re looking at a fix-and-flip Miami investment property or wholesale home, knowing the ARV is essential to valuing the deal!
BPO refers to what is called a broker price opinion. It is a report similar to a CMA (Comparative Market Analysis) performed by a broker, licensed real estate agent, or a property appraiser. The report will contain information regarding the property and the neighborhood. This information is used to determine the value and selling price of a house.
The Capitalization Rate is used to calculate the potential profit of a property. There are some variations on this, but most commonly the rate for a property is determined by dividing the property’s net operating income by the current market value. Knowing the CAP rate is most important for those looking to invest in Miami rental properties!
Capital gains refer to the increase in the value of a property over time. It is the difference between the current value and the original purchase price. The gains are not assessed and taxed until the property is sold. The taxes can be avoided when reinvesting elsewhere using a 1031 exchange.
Earnest money is a deposit made to a seller showing good-faith from a buyer. This allows the potential buyer to put a “hold” on the property while they do their due diligence and secure financing. Usually, an earnest money deposit (or an EMD) will make sure that a seller will stop marketing the property. Essentially, an EMD helps you “claim” your Miami investment property!
Equity is the difference between what you owe on the house and its current value. Let’s say the house is worth $150k and you owe the bank $50k, you would have $100k in equity for the home. When sourcing great Miami investment properties, it’s always a good idea to look for homes that need a lot of work where the owner has high equity.
The Gross Rent Multiplier or GRM is the ratio of the price of a real estate investment to the annual income provided by the property. It will let you know how long you need to own the house before it pays for itself.
An LOI or Letter of Intent is an agreement that states the intent of an investor to buy a property. It will outline the terms that must be met before a legally binding contract is signed.
The Loan To Value Ratio or LTV is the amount of the loan vs. the value of the property you are purchasing. This ratio helps lenders calculate which loans will go through for which properties. Lenders have different criteria for setting LTV’s on their hard-money loans, but we partner with lenders who offer up to 85% LTV on Miami investment properties!
NOI refers to the net operating income of a property. It refers to all the revenue received by the property minus the costs of standard ownership expenses such as taxes and maintenance. Like CAP rate, this number is most important for those looking to buy-and-hold rental properties!
REO stands for “real estate owned” and is the term used for properties owned by banks or lenders after an unsuccessful foreclosure sale. These properties can often be purchased at a price lower than market value. However, there can be some repairs needed or other problems to the property. These are great opportunities for investors who know how to navigate the foreclosure and REO process.
A short sale is the term used when a homeowner strikes an agreement with the lender to sell for less than what is owed on the home. This helps homeowners out of tight situations, and banks recoup some of their costs. Short sale homes can be usually be picked up for a low cost, but you should use caution when making the investment.
Knowing These Real Estate Investment Terms Are CRUCIAL For Your Next Miami Investment Property
When you begin investing in Miami real estate, there will likely be some terms that you are unfamiliar with. When you come across something you are unsure of, make it a point to fully educate yourself on the subject. A small misunderstanding of a term can result in a large error that can affect you financially.
It takes so much time and research to find a truly awesome Miami real estate investment deal. Don’t miss out on closing the deal because you have to spend even more time familiarizing yourself with terms that are popping up. Do your homework ahead of time!