If you’ve just entered the world of property investment, there is a lot of jargon thrown around in conversations that you may never have heard before. To better understand the field you’re entering, you first need to understand what everyone is talking about. Here are five common phrases used in property investment and what they mean.
REO, or real estate owned, is a term used to refer to a piece of property that’s owned by a lender, usually a bank, government loan insurer or government agency, after a foreclosure auction that was unsuccessful.
BPO stands for broker price opinion. This is the opinion from a real estate broker or agent about what the value of a piece of property is. On REO deals or short sales, it’s common to see a BPO. It’s not as thorough of estimation as an appraisal. The broker is paid a small fee to write up their opinion on the property value, which is then used to justify the sale. The bank uses this for confirmation that the deal is near market value, excluding the cost of repairs.
Net operating income is a calculation for rental real estate. It refers to how much money you would earn if you owned a piece of property clear of a mortgage. It’s calculated on an annual basis. The equation is the net rental income minus the operating expenses (not including the mortgage payment). On larger deals, you should aim for a NOI between 40 and 50 percent of the net rental income.
The CAP, or capitalization, rate is the NOI divided by either the value of the property or the selling price. The resulting number is represented by a percentage and is used to compare investment opportunities. The rate represents what your return on investment would be if you were the owner of the property.
LTV stands for loan to value. A lender bases the loan they’ll give you on the percentage of the property’s value. Many banks use an appraiser to determine the value of the property. When using a private lender, you can mutually agree on the value based on previous sales in the same market. This is a pretty basic term that will be thrown around in every conversation regarding real estate.