For new investors, it’s easy to get overwhelmed by facts, figures, formulas, and different investment calculations. And, although many people are aware of condo investing terms, they have trouble defining them or deploying them properly. Knowing these condo terms will not only make you a better investor. Although there are many different types of real estate investing, the fact is that there are several key terms that every condo investor should know.
#1. Return on Investment (ROI)
ROI, or return on investment, is an important formula to gauge how an investment performs. It’s a simple, quick calculation that lets you know how profitable an investment is. The formula looks like this: ROI = (gain from investment – cost of investment) / cost of investment
#2. Pre-Construction Appreciation
One of the many reasons real estate is a great investment is long-term property appreciation. But, condos have a second opportunity for appreciation, through the wonders of pre-construction appreciation. When you buy a condo before it’s constructed, you are paying today’s prices for a condo that won’t be constructed for several years. That means when your condo is move-in ready and you actually buy it (take out a mortgage), it’s already appreciated.
#3. Net Operating Income (NOI)
NOI, or net operating income, like ROI, is a great tool for calculating how profitable your properties will be. Although it may sound a little technical, the formula is actually quite easy: NOI = Revenue – Expenses This is an annual calculation and assumes you own a property free and clear. Expenses include all your operating expenses such as taxes, insurance, utilities, maintenance, etc.
#4. Capitalization Rate (Cap Rate)
This is a little more complicated. The cap rate is another way of calculating the rate of return on your investment properties. Although this formula is expressed as a percentage, many investors use only the number when referring to a cap rate. For instance, “the condo one of my clients just sold had a 5 cap!” Here’s how it works: Cap Rate = NOI / Current Market Value.
Refinancing is an important part of real estate investing, and can save you thousands of dollars per year. Like most other investing concepts, refinancing seems a little scary if you’re not familiar with it, but it is a very straight-forward process. Refinancing is simply negotiating a presumably better interest rate and/or terms for your property. It is usually done for one of two reasons: either to get a better interest rate, or to free up capital for your next investment. And the beauty in freeing up capital for your next investment is that you can pull it out free of capitals gains by refinancing. Capital gains aren’t actually realized until the property is sold, whether that is in 1 year or 100 years.
The above list of condo investing terms are some of the most important terms you need to know as a condo investor. If you’re consistently putting these concepts into practice, you’ll be in a much better position to analyze and evaluate your existing and future condo investments which means more money for you.