You want to invest in Real Estate but all of a sudden you are coming across terms like equity, cash flow, landlord, etc. You came across these terms and you don’t really know what they mean. Maybe, you are hoping to skip them from the real estate 101 lesson but if you want to get involved in the real estate business, you cannot but get accustomed to these terms. Today, I will discuss equity, mortgage, down payment and flip.
Common Words You Should Know Before Getting Involved in Real Estate
Equity – Mortgage – Down Payment: For most of us who are new to the real estate business these three words you are going to hear and use this term a lot. For example, you want to buy a $200,000 house. That’s the price you will have to pay to buy this house outright. If you had $200,000 in cash and you gave it to the owner of that house then, you will be declared as the owner of that house. In this case, there is no involvement of the bank. Or, you would get a mortgage because you don’t have the money to buy the house. You decide to go to the bank and have a mortgage. Now, the bank will give the money to the person that owns the house and the bank will be the owner of that house but here is an advantage of the mortgage. You can buy it back from the bank with terms and conditions and monthly returns. But let’s say, due to the circumstances, the owner of that house sold the house for $160,000 that is worth $200,000. Now, the bank tells you to pay some down payment. This down payment is taken for security reasons. The bank asked for a 5% down payment. So, the down payment will be $5,000. So, what is equity? The value of the house was $200,000 and you purchased it for $160,000 and you already gave $5,000 to the bank. So, you owe 155,000 to the bank now. This is the money that a bank wants you to pay back over a certain time. Generally, mortgage duration is 30 years and banks decide the amount be paid monthly; let’s say $1,000/month with interest. So, the difference between what is worth and what you owe is equity. At the beginning, your equity will be $200,000- $ 155,000= $45,000. If you hold the house for two years and the value of the house goes up to say $220,000. After paying the mortgage, two years later, you owe $150,000. Now, the equity of you is $70,000. Equity is also used as net worth. In real life, you cannot buy things with this money. It is a number on a balance sheet that is a part of your net worth. Flip: Now, after a certain time, you want to sell your house and you listed it on the market. You listed the house for $200,000 and you got it under contract for $190,000. After following a few steps and proper documentation, another bank comes to the scene and that bank buys that house from the bank that gave you a mortgage facility. Now, you owe $150,000 and the bank bought that house for $190,000; so the difference is $40,000. As you no longer own this real estate, this $40,000 plus any amount of money you made while renting the house is be defined as flip.
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