Welcome to the Real Estate Investment Terms From A to Z series. Each week we’ll take a letter from the alphabet and define all the real estate investing terms you need to know that begin with that letter. There were not too many key terms for the letters J and K, so we’ve come back with a vengeance with today’s letter……L!
This week our feature words are lease, lenders, leverage, liability, lien, line of credit, loan, loan origination fee and loan to value.
A lease is a contract that spells out the terms of an agreement between a landlord and a renter. This agreement will state the amount of rent that the tenant must pay and the amount of time the property will be rented. The lease will also list what the landlord’s responsibilities are to the tenant, and what the tenant’s responsibilities are to the landlord.
A lender is an institution that lends money to an individual or a company to secure property. A lender could be a mortgage company, a bank, a private person or a group of people.
When you leverage a property you are putting a mortgage on the property for the purpose of using the equity to purchase another property or making another business transaction. Leveraging allows you to avoid using your own money to advance your business forward.
Your liability is your exposure or risk that you have in a business transaction. You want to keep your risk or liability as low as possible. In the event the deal goes bad, you don’t lose too much equity or money.
A lien is the mortgage that is held on a property. A lien or mortgage holds the property as collateral until the monies are paid back in full.
A line of credit can be secured or unsecured. If secured, the line of credit would be a home equity line of credit. This loan would be secured by the real estate. If the line of credit is unsecured, then there is no collateral. The difference between a line of credit and a mortgage is when the line is paid off or down, that amount paid is available for use again. When a mortgage is paid off, those monies are no longer available.
A loan is a lien placed on a property that is being used as collateral to secure the monetary security.
A loan origination fee is the fee the lender charges to do the loan. This fee is a percentage of the total loan amount. It also can be negotiated to a lower percentage.
The loan-to-value (LTV) is the ratio between the loan and the appraised value of the property. If the LTV is 90% of a property that is valued at $100,000, then the loan would be $90,000.
That’s all for this week. The next group of real estate investment terms will all begin with the letter “M”.