Lots and Lots of Pretentious Real Estate Terms
I've been to a lot of investor meetings and real estate events and it can be a little weird when people are throwing around a bunch of terms which mean nothing to you. This was usually the point at which I just started ordering doubles at the bar, and then creepily lingering on the outskirts of someone else's conversation before deciding I'd just rent for the rest of my life.
Many, many uncomfortable events later, I feel fully comfortable with the terms and am happy to provide a quick guide to help you avoid the same discomfort.
1.) Primary Residence v. Investment. I know this one seems basic, but why not make sure that everyone knows exactly what these mean. A primary residence is where you live and take mail at. Lenders usually require 5% down for you to acquire a primary residence. An Investment is a property you buy but don't live in. Lenders require 20% down for investment properties.
2.) House Hacking. What is house hacking? House hacking has many forms, but in its essence, you are leveraging your house (primary residence) to make money or to save money on your mortgage or rent. House hacking looks a lot of different ways but the more common ones are renting out a room or multiple rooms to strangers, taking on a roommate you know and/or renting out your basement or some portion of your house on Airbnb.
3.) ARV. ARV means after repair value. People usually bring up this term when they are considering buying a house with a plan to renovate. The renovation could be upgrades or adding rooms/space or both- but what they want to know is, will the value of the home be worth more after the repairs than the cost of the repairs themselves. So, if you were going to buy a house for $100K (haha, never going to happen in Denver) and you put in $10K for AC and a skylight, you want to make sure that the house would be worth $110K or more after you spent $10K to improve it.
4.) Hard Money. What is hard money? Hard money is usually money you borrow from an individual rather than a bank. This happens when the bank considers someone so leveraged to not be safe to lend to anymore. If that person still wants to buy something, they seek out an individual with money and get a hard money loan. These loans have higher interest rates than the bank and are usually only used on investments rather than primary houses (where you would live.)
5.) iBuyers. Distilled down to its most basic form, an iBuyer is an app or a website that purchases or sells homes. Zillow, OpenDoor and OfferPad are all examples of iBuyers. They basically buy homes from sellers and then turn around and sell them to individuals. (As of 2019, these still have way too high of fees to be better than just using a real estate agent, but we all know that will change, and probably sooner rather than later.)
6.) 1031 Exchanges. A 1031 exchange is when you are selling one investment property for another investment property or income-generating piece of land. On a high level, 1031 exchanges are for investments only, provide a tax break, have very tight deadlines and require your money to be held in an escrow account by a 1031 professional. You do a 1031 exchange to avoid paying taxes.
7.) Short-term renter. A short-term renter is a renter who uses Airbnb or VRB for a furnished rental of 30 days or less.
8.) Medium-term renter. A medium-term renter is also often called a sub-letter, and is someone renting a furnished property for (usually) 31 days or more. They want a furnished place but they do not want to sign a long lease. Our experience with medium-term renters are that they usually are new to the city and trying to decide on what neighborhood to move to, are separated from a spouse or in town for an extended stay because of their job.
9.) HELOC. HELOC stands for Home Equity Line of Credit. A Home Equity Line of Credit can be used when you already own a property, and that property's value has increased. So, again if you bought a house in Denver for $360K in 2017 (that was the true median in Denver) and it is now worth $430K (the true median in 2019), you would have $70K in equity on that property. A HELOC allows you to access approximately 85% of that equity (so, $60K) and use it basically like a credit card. Although it may seem risky to use a HELOC on your house's mortgage, a lot of investors do use HELOCs to acquire additional houses. It's a fairly common practice, and I'm making this point because it personally took me some time to feel comfortable with it.
10.) PMI. PMI stands for Private Mortgage Insurance. Most people put 5% down on a primary residence and 20% down for an investment. Your loan provider requires a little more protection when you are just putting down 5%, so they require private mortgage insurance (PMI.) This is a monthly add on to your loan, and is usually dropped when 20% of your loan has been paid off. So, usually loans for the house you live in will require it (if you put less than 20% down), and are not required for investors (because they are usually required to put 20% down.)
That was a lotttt of pretention. Hope it helps, and as always- I'm a real estate agent and I work with buyers, sellers and investors. And I'd love to work with you as well if you need help. Thanks! - Erin