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Real Estate Investing Terms For Beginners

By | 2018-04-06T17:20:20+00:00 April 6th, 2018|Categories: Canadian Real Estate, Real Estate Investing|Tags: , |Comments Off on Real Estate Investing Terms For Beginners


Hey guys. Stefan Aarnio here for another video. We’re here in my condo today, we’re shooting some real estate investing terms. Now one of the terms you need to know, now if you want to be rich, if you want to be wealthy, you have to change your language. So over here you have your language, you could have your starter language. I used to be a musician, I spoke musician language, knew all the terms of music, we knew scales and arpeggios and all these chords and musician language.

And when you change your language, you change your life. So that’s something to think about is change your language, change your life. Now I’m gonna give you some real estate investing terms that you’re gonna need when you go out there, you start looking at properties. Maybe you wanna be flipping properties, maybe you wanna be doing buy and hold properties. Whatever it is, I’m gonna give you some major terms and some major acronyms.

So number one I wanna give you is ROI, return on investment. So this is in investing, if you’re a true investor, investing is really important … when you’re investing, it’s important to know what your ROI is, what your return on investment is. Now ROI has some sub-categories that you gotta look at especially when you get smarter. You got ROI, return on investment, then you got ROE, return on effort. ROT, return on time. And so when you’re doing your deal, you gotta look at what’s the return on investment, what’s the return on effort, what’s the return on time.
Something like there’s active and there’s passive investing. So here’s another term. Active investing versus passive investing.

So there’s active and there’s passive. So active investing is where you are doing the work. This is work. Passive is you bring the money to the table, no work. So there’s active and there’s passive. And so active investing is gonna use your time and it’s gonna use your effort, but it probably won’t use your money.

ROI on pure money is probably for the passive investor over there. Now another real estate investment term that’s really important to know is ARV, after repair value. So what is this property worth after repairs? So you have the today value, you’re gonna have the ARV, after repair value. You gotta get that from comparables market data, that kind of thing. Now there’s also a thing here, you see this, PP, PP means purchase price. What is the purchase price of the property? You’re also gonna see FMV, fair market value.

What’s the fair market value of the property? You’re also gonna see LTV, loan to value ratio. So this is for mortgages, for lending. A lot of properties like let’s say you’re doing a rental property in Canada, they want at least 20% down to the LTV that you need, loan to value ratio. Fair market value, what’s this thing worth today? Now FMV, this is kind of bullshit number, fair market value. I’m not sure if there’s such a thing as the real fair market value.

It’s really what is someone willing to pay? Somebody who’s willing to pay that money determines the fair market value. It’s kinda all over the place. Here’s another term that you need to know MAPP, maximum allowable purchase price. So what’s the maximum allowable purchase price that you can pay for this property and still make a profit? Then we also got MAPP, we also … now this one’s kinda self-explanatory, but some people don’t even know, you got the reno’s, says reno’s, but reno’s, the renovation. So what are the renovations take?

Now let’s get more into the cash flow terms. So cash flow and cash flowing properties, the cash flow on a property is the income, so what is the property make every month minus expenses minus debt service, DS is debt service. So that’s the cash flow. Then we got a couple other terms that are important. You’re gonna have a thing called the GOI, gross operating income. So the total income of property links. Then you’re gonna take out your expenses, what it costs you to own the property.

Now this doesn’t include DS, debt service. The mortgage doesn’t count in that. The GOI, you take the GOI minus you take your expenses out, minus expenses gives you a thing called the NOI, net operating income. So GOI minus expenses is net operating income. Now that you got the net operating income, you take the net operating income divide it by the value, what do you think the property’s worth. That’s gonna give you a thing called the cap rate, which is the capitalization rate. So what does this property capitalize out? It’s capitalization rate. Depending on the property or what part of town you’re in, the cap rates are all gonna kinda be different.

But good rule of thumb, if you’re buying a property, but it at seven to 11% cap. That’s usually a good rule of thumb and then if you can refinance it at like a four to six cap, you’re gonna make a lot of money buying it at a high cap, refinance at a low cap, that brings your value up. Now there’s other terms here you gotta know. You gotta know your equity, so this is how much of the property do you own, you need to know your debt, which is usually a mortgage, and you got your mortgage.
Mortgage is middle French, it means agreement until death. And so you got a mortgage here. And with this comes something called a mortgage schedule, which is all the payments, which brings you to a PNI, payment or you might say a pity payment, we’ll get into PITY, here’s PITY. PNI, principal and interest. So your mortgage payment, a portion of it typically is principal, a portion is interest. The PNI payment goes on a mortgage schedule and you can see how your properties getting paid down, how your equity’s growing.

Then there’s a principal interest taxes insurance, your PITI payment. So that’s another piece. Now I feel like some of you guys at home might be drowning in terms right now. Don’t be alarmed, don’t be freaked out. If this is freaking you out, this means you gotta get educated, you gotta start learning, start getting some books, maybe get a coach, get a mentor. This kinda stuff, I’m just rattling it off out of my brain right now, but I’ve got it internalized because I’ve been in the business for a long time and I just know this stuff.
Now for you, and for me when I started, you gotta start reading some books, take a seminar, take a class, start learning. This stuff … I love, I did an interview, I said, with Brittany Turner, doing $100 million project right now in Nashville, 29 year old woman, amazing woman, and she said, “Nobody’s born a real estate investor.” Nobody is born a real estate investor knowing this stuff. You have to study it, you have to learn it. So go take a seminar, go take a class, get a book, start reading, start learning these terms.

It’s not gonna happen overnight. Make sure you learn this, make sure you know this. I want you to put in your comments below any other terms you want me to know or want me to explain to you and let’s have a conversation, let’s have an interaction. I’m Stefan Aarnio. Respect the grind. Like, share, comment below, I wanna hear from you, and subscribe to my channel. I’ll see you on the next video.