Real Estate is one industry that everyone has to be a part of, at one or another stage in life. Be it buying a house, renting out your property, buying commercial spaces, everyone finds themselves standing at the door of this industry. Now for a person like us who had no idea about this industry, it felt really scary to step into it. When we brought our first office space for rental income, we had no idea about the industry, and to be specific, we didn’t know the meaning of all the hefty terms our Real Estate consultant was using. So here we are now with the top 10 most used words/terms related to Real Estate you must know before you step into Real Estate.
1. Commercial Property
It is the property owned for a purpose of income generation that can be done either through Capital Appreciation or Rental Income. These kinds of properties are generally used for business purposes. For example, An office space, medical centers, hotels, malls, etc.
Public trading of commercial properties is also feasible through Real Estate Investment Trusts (REITs)
When a property is designated as commercial property then the taxation related to that property changes. Commercial properties generally require a larger amount of capital than residential property. Although there are low ticket commercial properties available nowadays;
For more details on properties to buy, you can always Contact Us.
You can also read our article on things you should consider before buying a commercial property. Click here to read
2. Residential Property
As the name suggests, these properties are solely for living purposes. It can also be used for income generation in the form of rental income. But the rent will come from a tenant living in. One can not use these properties for business activities.
These require less capital as compared to commercial properties. It can be an apartment, a villa, or a normal single-family house.
3. Industrial Real Estate
These are the real estate that can accommodate production, assembly, storage, warehousing, and other industrial activities. These properties are marked separately so that their functioning doesn’t affect the residential or business areas in the city. You can always find an area in a city named as Industrial area.
These properties also offer higher rental yields than residential properties. Their leases are longer which secures your investment. However, they require huge capital investment upfront and their risk of vacancy is also high.
4. Rental Yield
It is one of the technical terms/words related to real estate which is used to evaluate how good a property is for rental income.
Rental yield= (Annual Rental Income X 100) / (Amount Invested on Property)
It can be compared with the returns one can get on other investments. After comparison, one can figure out what is best for him. Don’t forget to take capital appreciation into account while comparing.
Rental yield depends upon the type of property you own. It is about 2-4% for residential property and 6-10% for commercial property.
5. RERA
RERA stands for Real Estate Regulatory Authority. It comes under the Real Estate (Regulation and Development) Act 2016. This act was basically passed to protect the home buyers. Various malpractices were going in the Indian Real Estate market. Delayed possession, projects hanging in the middle, diverting funds were some of the common issues in the Indian real estate market before this act.
Post-implementation of RERA, the builders have to tell the possession date. They have to pay huge penalties in case they miss the possession date. All the money to be used in the project will move through an escrow account. The Government governs the escrow account. Basically, surveillance of government bodies over real estate projects has been increased and that has made real estate investing a safer option in India.
6. Escrow Account
It is an account in which funds are held, withdrawn, or deposited by two or more parties on trust. A third party manages this type of account. The transactions are allowed only after the parties fulfill the escrow agreement.
It is used to prevent misuse of funds. It is mostly used in Real Estate transactions as it involves huge capital. This was introduced in the Real Estate market as earlier the builders used to deviate the funds for one project to another project.
The money from the buyers goes into an escrow account and not in the account of the buyer. The introduction of the escrow account in the real estate market has made this market safer to invest in.
7. Cash Flow
Cash Flow is the monthly profit that is being generated through a real estate property after deducting all the monthly expenses on the property. Monthly expenses include operational cost, maintenance cost, etc.
Cash Flow is the factor that will determine whether you buy the property or not. Investors always look for positive cash flow properties. The higher the cash flow better the property. Real estate cash flow is a very good source of passive income.
Robert T Kiyosaki is one such person who has retired on the passive income through his real estate portfolio.
You can also read our article on the book summary of “The Accounting Game” to know more about Cash Flow and other important financial terms. Click here to read
8. Difference between Real Estate Agent, Broker, and Realtor
Real Estate Agent: A real estate agent does the job of bringing a buyer and seller together. They basically facilitate a real estate transaction and get a commission for it.
Broker: A broker is more of a technical person in the real estate industry. He knows all the minute criticalities. A broker can be independent or can work for a Real estate firm.
Realtor: For being a realtor, one has to be a member of the National Association of Realtors India. The person can either be an agent or broker or salesperson.
9. Real Estate Investment Trust
This is an investment option build on the lines of mutual funds. The difference is that in mutual funds the basic asset is stocks, bonds, etc. but here it is real estate. The basic structure is similar here. These also have sponsors, fund managers, and unitholders. The income source here would be the rent or lease amount and the capital appreciation.
The key here is you don’t need to buy the whole property to get these benefits. You can buy the unit in a REIT and you can reap the benefits of real estate income through minimal investment.
The guideline for investment and other REIT-related issues has already been released by SEBI. They were last amended on 1st March 2019. India’s first REIT was formed in April 2019 called the Embassy REIT backed by Blackstone Group LP.
10. Mortgage
The mortgage is basically an option to avail loan by providing your immovable assets like a home or a commercial property. It gives the lender the right to take the property in case an individual fails to return the money.
Mortgage can be for property and against a property. When it is taken for a property then the amount taken can be used for that property only. But if it is taken against a property then there is no boundation on the use of the amount sanctioned.
So, folks, now you won’t be feeling helpless during your next meeting with your agent. Because now you know the meaning of the 10 most used terms/words related to real estate.
If you want to know more about real estate related terms/words, feel free to contact us or let us know through our comment section below.
