It’s easy to feel overwhelmed with all the different real estate investing jargon out there. As a beginner, you’ll often encounter terms that will pretty much make your head spin, and even prevent you from starting your investment journey.
So, to help remove some of the confusion from investing, the team here at SmartCrowd has rounded up the most common real estate investing terms to get you up to speed and boost your confidence.
After all, investing isn’t just for the pros. So, if you’re looking to make your first real estate investment, then these are #TheSmartEdition terms that will get you better equipped to reach your financial goals.
#TheSmartEdition Real Estate Investing Definitions:
1. Return On Investment (ROI)
Return On Investment (ROI) is one of the most important factors to consider when making a real estate investment as it helps you evaluate whether property investment is profitable or not.
ROI is calculated by taking the net income, which is the gain on the investment subtracted from the cost of the investment, and then dividing it by the cost of investment. Make sure to factor in all costs involved with the total capital investment cost, such as loan terms, interest rates, service charges, maintenance costs, and so on. Ultimately, the higher the ROI, the better the profit earned.
ROI = Net Income (Gain – Cost Of Investment) / Cost Of Investment
Simple ROI Calculation: If you invested $200,000 in property and sold it after 5 years for $250,000, then your ROI would be:
($250,000 – $200,000) / $200,000 = 0.25 = 25%
Read more about ROI here: https://smartcrowd.ae/blog/financial-education/all-you-need-to-know-about-real-estate-roi/
2. Purchase Cost
Purchase Costs are the additional costs associated with the initial investment amount. In Dubai, this could be the Dubai Land Department (DLD) Fee of 4%, Brokerage Fee of 2.1%, Trustee Fee, DEWA and Chiller Deposit, DIFC NOC Fee, Renovation/Refurbishment Cost, SPV Registration, and other adjustments.
3. Dividends
Dividends, or recurring rental income, are the company’s way of distributing earnings to their shareholders. Dividends are distributed proportionately to the investment you make. So, if you invest in 10% of a property, then you’ll receive 10% of the total rental income generated.
At SmartCrowd, dividends are sent out on a monthly basis, which you can either withdraw to your bank account or re-invest into a different property on our platform.
Watch our video on Dividends:
4. Gross yield
Gross yield is the total rental return you receive from the tenant of a property before expenses are taken into account. To work out the gross yield, just sum up the total yearly rent that you’d charge a tenant, without deducting any fees, then divide that number by the property purchase price.
For example, if you’re charging your tenant an annual total of AED 85,000 and the property value is AED 800,000, then your gross yield is 10.625%. However, this value does not reflect the annual returns you would receive from your investment.
5. Net yield
Net yield is the total income generated after deducting all the costs and operating expenses involved, so this is what ends up in your pocket. On the SmartCrowd platform, this is what we refer to as the ‘dividend yield’.
When you purchase a residential property, as the owner, you’re obliged to pay the ongoing costs of maintaining and operating the property. These costs take into account things like property insurance, service charges, property management fees, upkeep costs, and so on.
So, using the numbers from the previous example, let’s say the expenses totaled 15,000 AED. Therefore, the total income earned per year, including these expenses, would go from 85,000 AED to 70,000 AED. This means that the money you’d receive has gone from a gross yield of 10.625% to a net yield of 8.75%
Learn the difference between gross and net yield:
6. Cash Flow
Cash flow refers to the net amount of cash you pocket every month from a property after covering all the operating costs. It is the net difference between money coming and going out from your asset, so cash flow can be either positive or negative.
When your income is more than your expenses, then your investment is profitable and maintains a positive cash flow. But if your expenses are more than your income, it is termed negative cash flow — and that’s not good for investment.
To calculate a property’s cash flow, you would need to find out how much rent it generates each month, known as the gross operating income (GOI). After deducting all the expenses associated with running the property(mortgage payments, maintenance costs, repairs, etc.), you’ll reach your net operating income (NOI).
So, if your property generates $2,000/month in rent but costs $2,200/month to maintain and operate, then its NOI would be -$200/month ($2,000 – $2,200 = -200), indicating a negative cash flow – not good.
If the NOI is positive, where you generate more rental income than expenses, then your rental property has positive cash flow.
7. Capital Appreciation (gains)
Appreciation refers to an increase in the value of property over a period of time. Factors like a highly favorable location, increased demand, limited supply, inflation, and so on, can influence the capital appreciation of properties.
For example, property prices are likely to appreciate in areas where there are various upcoming commercial developments. Additionally, properties with many nearby amenities and attractive views are also likely to witness a higher appreciation rate than others.
8. Diversification
Diversification is the process of spreading capital across many different assets, otherwise known as not putting your eggs in one basket! It is considered essential in building a solid investment portfolio, as it helps reduce your overall risk.
You can diversify both across different asset classes and within specific asset classes. In fact, real estate is a great asset class if you’re looking to diversify within an asset class, as you can spread your funds across multiple properties, reducing your risk.
9. Holiday home
Holiday homes, or short-term rentals, describe furnished apartments that are rented for short periods of time, typically on a monthly basis, as opposed to annual apartment rentals. They are seen as an alternative to hotels because they’re cheaper, allow more privacy, and offer greater flexibility, all while being close to all the major hotspots.
Holiday homes are a particularly great option to invest in Dubai, as there’s been a rising demand for short-term rentals in the city, especially with Dubai leaving its mark as the ultimate tourist city. Not to mention, the Qatar World Cup is just around the corner, so now’s the perfect chance to consider investing in Dubai holiday homes as you can even charge a premium as demand soars.
10. Long-term Rental
Long-term rentals are usually rented out to tenants for more than six months on average, though this figure can range from 30 days to one year. Long-term rentals can be furnished or unfurnished, and are suitable for tenants looking to base themselves in an area for an extended period of time.
Long-term rental can be a successful investment strategy, as it’s an efficient way to produce consistent, positive cash flow, offering a more reliable stream of income than its short-term rental counterpart. Nevertheless, it’s always a good idea to spread your risk and invest in both long-term rentals for reliability, and short-term rentals for the strong demand and higher potential yields.
In A Nutshell
And there you have it! These were our top 10 real estate investing terms you should know before starting your journey towards financial freedom.
Got any more terms that need clarifying, or tough codes you want us to crack? Then feel free to shoot us a message or email, and we’ll make sure to get all that covered for you.
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Disclaimer: This blog is intended solely for educational purposes and shouldn’t be treated as financial advice. We suggest you always conduct thorough research, perform your own due diligence and consult with financial advisors to assess any real estate property against your own financial goals.
