Commercial Real Estate Investing: More Terms to Learn the LanguageBy Rob Powell
Greetings from the metropolis of Cedar Crest, NM!
I hope this post finds all of you doing well.
Today’s post is yet another post on real estate terms/definitions. Yesterday, my buddy Brian (from the great state of Oklahoma) called me to talk about a business deal he was considering. After our phone conversation, I realized that I rattled off a bunch of investing lingo that I am not sure if I helped Brian or not. But luckily, I can call him back. But what about the rest of us? If we do not understand the lingo….the language of the investment vehicle (stocks, real estate, etc.), we could position ourselves to lose a lot of money or even leave some money on the table. So….let’s learn the language…..
Speak the language or DIE! (okay..not really…but…maybe LOSE!…?)
The real estate investment arena is filled with its own language and often features terms from property law, banking concepts and feudal times. As a continued segment to help you navigate the real estate investment lingo, we will be periodically posting commonly used real estate investment terms and definitions provided by many sources including www.investorwords.com and www.creonline.com.
This posting will focus on miscellaneous terms related to commercial real estate.
Affordability analysis is the process lenders use to determine an individual’s ability to afford real estate. This includes examining income, available cash, real estate price, liabilities and other costs. Beginning investors should know and understand their affordability assessment.
Cost Value Logic
Cost value logic refers to a process where divisions or assets are analyzed based on economic rent and opportunity cost with the objective of determining which divisions or assets should be bolstered and which should be eliminated. Cost value logic is imperative to evaluating your real estate portfolio. By determining which investments are your highest producers for least liability and bolstering them, you can eradicate troubled investments and free cash for future investing. It will also allow you to limit your liability.
Economic rent is the amount of money a property could produce if it were leased.
An escalation clause refers to a legal term in a contract that specifies that if costs go up, the rent will go up. For example, a multifamily lease to a tenant may state that if the landlord pays the gas bill, the rent may increase if the gas bill increases.
Free and Clear
Free and clear is a legal concept that refers to property rights. A free and clear title does not have liens or legal question regarding property ownership. Title companies and title insurance are used to make sure that real estate transactions only occur for free and clear titles. Free and clear titles are also referred to as perfect title.
A general lien is a legal term that means an interest has been placed against all goods, not just the source of the debt, owned by the lienee. General liens do not apply to land or real property. When buying commercial real estate, you should always take title free and clear, meaning there are no liens against the property.
Rent seeking refers to spending limited resources to procure an asset that generates economic rent.
Transfer earnings refer to the dollar amount that a production factor (land, labor or capital) must earn to be more valuable than repurposing it. For example, a multifamily unit property makes more money from leasing individual units than from just owner occupation.
A warranty deed given by the seller to the buyer guaranteeing title to the propery.
Well…that concludes today’s terms…..until next time…..rob