Real estate is one of the safest investments you can make and there are numerous benefits to it. With the right real estate investment, you can enjoy excellent returns and predictable cash flow. Moreover, real estate investment is great because it appreciates in value, thus keeping up with inflation and providing higher returns. But for choosing the right asset for your real estate investment, you need to do your homework. If you’re just starting out as a property investor, understanding the real estate industry can be intimidating with a lot of jargon, technical terms, and complex terminologies.
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So, it is important that you understand the basic real estate terms and definitions that you’ll come across. Here are a few common real estate terms and definitions that every property investor should know.
The carpet area is the net usable area of the house. It includes the thickness of the internal wall but excludes the balcony or terrace. The larger the carpet area, the better space you get.
As a beginner property investor, this term is important to know because, according to the provisions of the Real Estate (Regulation and Development) Act, 2016 (RERA), it is now mandatory for the developers to make buyers aware of the carpet area. The price of the property must be quoted based on the Carpet area.
Built-up area refers to the total area that is measured on the outer line of the property including, the balcony, terrace, etc.
This is the area that includes both the carpet area and the walls and doors. As a property investor, you must know this term because the built-up area is the carpet area plus the areas covered by inside and outside walls. This plays a major role in determining the size and price of the property.
Freehold property can be defined as any property which is ‘free from hold’ of any entity besides the owner.
In a freehold property, the owner has complete and unconditional ownership of the property as well as the land on which the property stands. For example, if you own a freehold property, you can use the land or the building for any purpose in accordance with the local regulations. You also won’t require any legal or government consent to sell it, so it comes with less paperwork. As a buyer, it is better to choose a freehold property for your investment as they offer better clarity on its future prospects.
A Title deed is a legal deed or document that constitutes evidence of ownership of a particular property.
This is an important term you need to know because, when you are buying a property from a seller, you need to make sure that the name in the title deed is of the buyer. This helps to avoid legal issues and complexities in times of registration.
Real estate stamp duty is a type of tax collected by the government when a property is sold and registered to another owner.
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You need to be aware of this because whenever any movable or immovable asset changes hands, the buyer of the property has to pay a certain amount of tax to the state government to get it stamped. The stamp duty varies from state to state, depending upon the property location and type of deed. The stamp duty is usually charged on the transaction value or circle rate (Circle rate is the government-determined price for a property below which it cannot be registered in the government records) whichever is higher. For instance, if the value of the property is INR 1 crore, and the stamp duty is 3%, the buyer has to pay an amount of INR 3 lakhs as tax.
Term: Capitalization rate
Capitalization rate or cap rate is the ratio of the net operating income produced by an investment property to its current market value.
This helps to determine the value of a real estate investment. The cap rate is always calculated using the current value of the investment property, rather than the purchased value of the investment property.
Term: Proof of funds
Proof of funds is a statement from a financial institution like a bank to confirm that the buyer has enough funds to proceed with an offer to the seller.
This is a crucial term you need to know as a beginner real estate investor as proof of funds reduces the risk of investment.
Term: Carrying costs
Carrying costs are the costs like interest payments, taxes, insurances, and utilities that are incurred from the time the property is purchased until the time that it is sold.
Carrying costs are important because they can directly affect your profit. If you’re planning to purchase a property for selling it to higher profits, you need to factor carrying cost into your list of expenses.
Term: Capital expenditure
Capital Expenditure or CapEx is the amount spent on the investment property in an attempt to increase the lifespan and value of the property.
Capital expenditure includes the cost of renovations such as replacing a roof, adding an extension, or doing a new paint job. These are one-time, major expenses that a buyer needs to incur to ultimately improve the value of the property.
Term: Clear title
A clear title in real estate is when there is no claim or legal right against the property from others that put into question the legal ownership of an asset.
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In short, a property with a clear title is a property that has no disputes from other parties. The buyer purchasing the property with a clear title can claim full legal ownership of the property.
Term: Due diligence
Due diligence in real estate is the reasonable steps taken by the investor to avoid taking wrong decisions or committing any errors.
Basically, due diligence is doing your homework before buying a real estate investment property in order to minimize risk and potential loss after purchase. This includes reviewing all the documents, calculating the expenses, and legal clarifications.
Property investing can be confusing if you don’t know the common real estate terms. Understanding these terms and definitions can help you make a good investment and enjoy its benefits. So, whether you’re a beginner real estate investor or just need a reminder, knowing the meaning and understanding these common real estate terms is crucial. Of course, these are not all the terms in real estate investment and you will come across more terms as you gain experience in the industry. But knowing these common real estate terms and definitions will serve as a good start for your real estate endeavours.