Learn the lingo that counts
Real estate investors, brokers, agents, asset managers and industry professionals from financial institutions can often forget that some of the terminology they use is unfamiliar to those outside of the real estate industry.
Here is a six-part series on must-know real estate terms to help you understand and manage your investments with confidence. We unpack 5 terms you need to know that can impact on your investments and finances.
Most mortgages don’t get paid down evenly over time. Most mortgages are amortized, meaning that each month, a little more of the money you pay goes towards principal and less towards interest. At first the principal portion is not much at all. Over time, the principal side goes up and up, to the point where you build a big snowball of debt pay down each month.
Definition: CapEx, or Capital Expenditures, are defined as new purchases or major improvements/renovations that extend the life of a property, such as replacing a roof, adding an extension or finishing the basement. This term also covers equipment and supplies required to make these improvements. Generally these are one-time, major expenses. Think of it this way: Routinely re-painting your rental home after tenants move out is not a capital expenditure. Installing a new furnace is
3. Gross Rental Yield
Definition: Gross rental yield is the total income generated by a property, divided by the price paid for the property and associated closing costs. This is what you get before deducting operating costs (maintenance, property management, insurance, HOA fees, etc).
Why it matters: Gross rental yield provides investors with a quick reference for an annualized return on an investment.
Monthly rent x 12 / purchase price and associated closing costs = Gross yield
Equity is the difference between the current market value of the property and the amount that you (the owner) owe on the property’s mortgage. If you were to sell your investment property, the equity would be the money you receive after paying off the mortgage in full. This value can build up over time as the mortgage balance declines and the market value of the property appreciates.
Definition: In real estate, debt-to-equity (D/E) ratio is a measure of ownership. This ratio helps you determine how much of your property is actually yours (if you took out a mortgage to finance it) and how much you owe in debt.
5. Repo and Interest rates
The repo rate is the rate that the South African Reserve Bank lends money to the commercial banks such as ABSA, Investec, Standard Bank, FNB, Nedbank, RMB. Banks normally determine their prime interest rate according to the going repo rate. The prime interest rate is the interest rate which banks lend money to their clients. It is higher than the repo rate in most cases as the rate fluctuates.