13 Real Estate Terms You Must Know Before Investing
Are you a newbie in real estate investing? Want to learn about the most common terminologies used by real estate marketers? We are happy to help you with this. Whether you are planning to make your first real estate investment or planning to diversify your investment portfolio, there are many common acronyms and jargons that you need to know beforehand. So the next time you hear a word such as ROI, EMI or FSI you would know what it means and its significance.
As a beginner, it is not practical to learn all the terms at one go, but you can get familiar with a few common ones here. We have compiled a list of 13 common real estate terms every real estate marketer or investor should know.
1. Return on Investment (ROI)
Return on Investment (ROI) is a measure of the profit you get on an investment. ROI is calculated by dividing the net profit by the total capital cost of investment. The higher the ROI, the better the profit earned. ROI calculation helps you to decide whether an investment is profitable or not.
ROI = Net Income / Cost of Investment
2. Basic Sale Price (BSP) or Market Value (MV)
Basic Selling Price (BSP) or Market Value (MV) is the base rate per sq ft at which the property is listed for sale by the seller. It doesn’t include additional charges such as Goods and Services Tax (GST), amenity charges, preferential location charges, and other maintenance fees. These additional charges can come up to 20% of the BSP.
3. Cash Flow
Cash flow refers to the net amount of cash you earn every month from a property after deducting all the operating costs. It is the net difference between money coming and going out from your asset. When your income is more than your expenses, then your investment is profitable and maintains a positive cash flow. But if your expenses are more than your income, it is termed as negative cash flow. Ideally, an investor should choose a rental property which maintains a positive cash flow.
HOA or Homeowner’s Association is a self-governing organization comprising a group of homeowners in a particular subdivision, apartment or planned housing community. HOA is eligible to enforce rules for maintaining the properties in good condition and also collect monthly maintenance fees from the owners. When you buy a property within a particular HOA, you will become a member of the association and will be liable to pay the HOA charges required for the routine maintenance of the property.
Appreciation in real estate refers to an increase in the value of property over a period of time. Factors like highly favourable location, high property demand, limited supply, inflation, etc can cause value appreciation of properties. For example, in localities where new and upcoming commercial and infrastructural developments are in progress, the property prices are likely to appreciate rapidly. Apart from that, properties with a special ‘view’ such as nature, lake or sea will have more demand among buyers and thus will witness a higher appreciation rate than others.
6. Turnkey Property
A turnkey property is a home or apartment that is nearing completion or is very close to ready-to-move-in status. Turnkey properties generally have a high demand among investors as they can buy and start renting it out without waiting for long. As these properties are newly built, the owners need not have to do any kind of major renovation or repair works. Another benefit of turnkey properties is that buyers can directly see the home and assess its quality and other related features before purchasing it.
7. Equal Monthly Installment (EMI)
Equal Monthly Installment (EMI) is the monthly amount that a loan borrower has to pay to the lender. EMI is applicable for buyers who are availing a home loan to purchase a property. EMI is calculated on the basis of various factors like the loan amount, loan tenure, salary, age, credit history, etc. Most of the banks and financial institutions offer home loans to aspiring buyers. You can make use of an online home loan EMI calculator to calculate your EMI based on the principal loan amount, loan tenure and rate of interest.
8. Built-up Area
Built-up area refers to the entire floor area of the home or apartment, including the carpet area, internal & external wall thickness and balcony area. In India, up to 30% of the area of an apartment will be used to build inner walls and balcony spaces. For instance, if the built-up area of a house is 1000 sq ft, the carpet area will not be more than 700 sq ft. So the built-up area is the actual area that will be used by the home buyer.
9. Carpet Area
According to the Real Estate Regulatory Authority (RERA), Carpet area is the net usable floor area of an apartment excluding the area covered by the external walls, areas under services shafts, exclusive balcony or verandah area and exclusive open terrace area, but includes the area covered by the internal partition walls of the apartment. In other words, carpet area is the area that can be covered by a carpet or the area of the apartment excluding the thickness of inner walls.
10. Super Built-Up Area
Super built-up area is also known as the saleable area as it is used by realtors to promote their projects among buyers. Super built-up area is the area including carpet area, wall thickness and other areas within the apartment such as terrace, corridors, lobbies, stairs, lifts, etc. In some cases, builders also include amenities like gymnasium, swimming pool, clubhouse, and garden in the super built-up area.
Super built-up area = Built-up area + common areas
11. Floor Area Ratio (FAR) or Floor Space Ratio (FSR)
Floor Area Ratio (FAR) or Floor Space Ratio (FSR) refers to the maximum floor space which is permitted for constructing a building in a given piece of land. I.e. It is a ratio between a building’s gross floor area and the land area. It is also known as FSI (Floor Space Index) where the only difference is that it is expressed in percentage. FAR guidelines differ from one locality to another and are decided by the respective local municipalities. Features like the height of a building and the number of floors are decided based on the FAR value. A higher FSI will have a higher built-up area.
12. Freehold property
A freehold property refers to one where the owner has complete and unrestricted ownership of the land and building. In this case, the owner has no restrictions to transfer it further and the property can also be inherited. Freehold properties are more stable than leasehold properties and will fetch more value in future. A freehold land is generally bought through an auction or lottery. When you buy a freehold property, you also own the land it was built on, along with the house itself. The sale of a freehold property is more easier as no authorisation from the state is required.
13. Credit Score
Credit score is a measure of a person’s creditworthiness or eligibility to repay a loan. The credit score, also known as CIBIL score is a three-digit number, which ranges from 300 to 900, A good CIBIL credit score is considered to be 750 or higher. Banks and other lenders evaluate an individual’s credit score before issuing a home loan. It is calculated based on the person’s past credit history. The better the credit score, the higher are the chances of getting a loan approved. A higher credit score can also give other benefits such as lower interest rates, flexible repayment terms, quick approval process, etc.
Real estate is one of the most profitable types of investments in India. Property is a lifetime asset which increases in value. If you are well aware of the market and its prevailing terms, you can make the right investment which promises great profit. We hope that this article was helpful for you.
If you have any property related questions you can reach out to our advisors and we will be happy to guide you.