3 Terms to Know When Investing in Real Estate
NEW YORK, November 28, 2022 (Newswire.com) - Whether it's a desire to invest in art, real estate, or another alternative asset class, platforms like Yieldstreet provide unprecedented access to investors of all experience levels looking to earn returns outside of traditional public markets. But before diving into the dynamic world of alternative investing, it's important to take the time to understand the terminology used in association with the specific asset class and understand and appreciate the space.
When it comes to real estate, there are plenty of terms that the average investor may not be familiar with, or otherwise might not understand in the specific context of the sector. To kickstart the education process, here are three common terms used in real estate that every investor should know:
Annual Percentage Rate (APR). Unless buying with cash, investors will likely need to obtain a loan in the form of a mortgage when purchasing a home. In this case, it's important to understand annual percentage rates (APRs) at the outset of the process, including how they differ from interest rates. This can be confusing for new home buyers, as the advertised interest rate on a loan will typically be different than the APR. To put it simply, the APR on a home purchase is the total cost of borrowing throughout the life of the mortgage and includes interest as well as items like points and fees associated with obtaining the loan. Interest rates, on the other hand, will usually not include additional fees, so it's important to know the full cost of the home loan as represented by its APR.
Equity. One thing all investors should be aware of before investing in real estate is the difference between the property itself and the equity in the property, or more specifically, as it relates to valuations. While the property itself will have a current market value, equity will be represented by the difference between that value and the amount the owner or investor owes toward the property's mortgage. Ideally, the value of equity should rise continuously as the balance on the loan gets paid off and the value of the property gradually appreciates over time.
Real Estate Investment Trust (REIT). Real estate investment trusts, or REITs, are companies that own a variety of income-producing properties—whether apartment buildings, hotels or other commercial buildings—and allow investors to buy shares and generate gains. Importantly, REITs come in different types, such as mortgage or equity, and the process of investing will vary depending on the offering. For example, public REITs can be bought and traded actively on exchanges, much like stocks, whereas private offerings like Yieldstreet's Growth and Income REIT allow investors to earn passive income in the form of quarterly returns.
Investing in real estate can involve much more than simply buying and selling properties, and it's important to understand some of these alternative strategies to determine the best investment to suit their means and goals.