Real Estate Terms To Know Before Investing

Real Estate Terms To Know Before Investing

Are you a newbie in real estate investing? Are you confused with the terms that are commonly used in real estate? If you want to learn the most common terminologies used by real estate marketers, then we have got you covered. 

Whether you’re planning to make your first real estate investment or planning to diversify your investment portfolio, there are many common acronyms and jargon that you need to know beforehand. In case, next time you hear the words like ROI, EMI or FSI you will know their significance and meaning.

As a beginner, it is not possible to learn all the terms in one go, but you can get familiar with a few common ones here. We have compiled a list of common real estate terms that every real estate marketer or investor should know.

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 

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. 

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 that maintains a positive cash flow. 

HOA

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. 

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 of 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.

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.

Appreciation

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. 

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. 

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 a gymnasium, swimming pool, clubhouse, and garden in the super built-up area. 

Super built-up area = Built-up area + common areas

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.

Credit Score

A 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, a quick approval process, etc. 

Floor Space Index (FSI)/ Floor Area Ratio (FAR)

Floor Space Index or Floor Area Ratio is the ratio of the combined gross floor area of all floors (excepting areas specifically exempted under regulations) to the total area of the plot. It varies from locality to locality depending on the surrounding infrastructure to support the development. Higher FSI or FAR tends to indicate more urban (dense) construction.

Carpet Area 

According to the Real Estate Regulatory Authority (RERA), the 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, the carpet area is the area that can be covered by a carpet or the area of the apartment excluding the thickness of inner walls. 

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. 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 easier as no authorisation from the state is required. 

Amortization

Amortization is the repayment of a debt or financial obligation over a period of time.

EMI

Equated Monthly Installment (EMI) is a fixed payment amount made by a borrower to a lender at a specified date each calendar month. Equated monthly instalments are used to pay off both interest and principal each month so that over a specified number of years, the loan is fully paid off.

FERA

Foreign Exchange Regulation Act, 1973. An act to regulate certain payments dealing in foreign exchange, securities, the import & export of currency and acquisition of immovable property by foreigners. Under Section 31 (1) of the Act, it is mandatory for foreign corporations, which are not incorporated in India to obtain permission from the Reserve Bank Of India (RBI) to acquire, hold, transfer or dispose of in any manner (except by way of lease for a period not exceeding five years) any immovable property in India.

Fiduciary

A person legally appointed and authorized to hold assets in trust for another person. The fiduciary manages the assets for the benefit of the other person rather than for his or her own profit.

Lien

A legal claim against a property must be paid off when the property is sold.

Liquid Asset

An asset, cash or otherwise, can be converted into cash.

Market Value

The price at which a seller is happy to sell and a buyer is willing to buy. This assumes that there is sufficient activity in the marketplace to generate enough buyers and sellers so that neither party controls the price.

Property Tax

Property tax is a tax paid on property owned by an individual or other legal entity, such as a corporation. It is calculated by a local government where the property is located and paid by the owner of the property. All states have different tax structures and rates.

Residential Property

Any property, which is used for residential purposes. These areas are specifically earmarked as such by the concerned local municipal body.

Site Plan

A drawing of an area of land, on a horizontal plane, showing the boundaries and physical extent of the land included in a particular parcel. It may also show any existing buildings or the proposed layout of a development.

Sub-Leasing

A method wherein, the primary lessee of a property has the right to further lease out a part or whole of the property to another occupier or lessee. Essentially, the right to sublease is decided beforehand at the time of signing the main lease agreement and is with the consent of both the lessor and the lessee.

Subdivision

A tract of land divided into individual lots for housing development.

Ready to Move Property

A property that is ready to occupy i.e. which is complete in all respects including all utility connections and has received a completion certificate.

Foreclosure

A situation in which a homeowner is unable to make principal and/or interest payments on his or her property loan, so the lender, be it a bank or building society, can seize and sell the property as stipulated in the terms of the loan agreement.

Letter of Intent (LoI)

A letter of intent (LOI) is a document outlining an agreement between two or more parties before the agreement is finalized.

Valuation

The process of making an estimate of the worth of real property or real property or other assets for a particular purpose eg. letting, purchase, sale, audit, rating, compulsory purchase or taxation. The purpose and the relevant circumstances determine assumptions and facts that are appropriate and hence the process used.

Lump-Sum Contract

A type of construction contract requiring the general contractor to complete a building or project for a fixed cost normally established by competitive bidding. The contractor absorbs any loss or retains any profit.

Maintenance Charges

Charges payable by the owners/occupants of a development (apartment complex / commercial complex / plotted development etc) towards upkeep & maintenance of all common areas and facilities. It is normally a monthly charge and the amount payable is dependent on the kind of amenities that are part of the project. Also called Common Area Maintenance (CAM) charges.

Stamp Duty

A state tax on conveyance or transfer of real property calculated on the total value of the property or the circle rate of the area, whichever is higher. Stamp duty charges vary from State to State and generally range from 4% to 10% of the property value or the circle rate.

Real Assets

Physical or tangible assets that have value, due to their substance and properties. Real assets include precious metals, commodities, real estate, agricultural land and oil.

Settlement

Settlement (Closing) is the final step in executing a real estate transaction when the final payment is made by the buyer, the sale deed is signed, the title is transferred to the buyer by registration of sale deed, loan documents come into effect, costs are paid and the new owner takes possession of the property.

Floating Interest Rate

An interest rate that is allowed to move up and down with the rest of the market or along with an index. Also known as the variable market.

Liability

An obligation of an entity arising from past transactions or events, the settlement of which may result in the transfer or use of assets, provision of services or another yielding of economic benefits in the future. Debt is a form of liability.

Real estate is one of the most profitable investment types in India. Investing in property is one of the lifetime assets whose value increases with time. If you are aware of the market and its prevailing terms, you can make the right investment which promises great profit. 

If you have any property related questions, you can reach out to us and we will be happy to guide you. 

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