Here are some common real estate terms you should know before investing:

Property appreciation

Increase in the value of a property over time due to factors like demand-supply, location, improvements, etc. Appreciation leads to capital gains when the property is sold.

Capital gains

Profit earned from selling a property at a higher price than the purchase price. The difference between the selling price and indexed purchase price is taxable. Capital gains are greater when appreciation is higher.

Cash flow

The amount of money generated from rental income less all expenses. Positive cash flow means there is money gained each month after all costs. It indicates a good investment. Negative cash flow means expenses exceed income.

Equity

The percentage of the total property value that you own unencumbered by any loans or mortgages. Equity increases as you repay the mortgage principal and from appreciation. It generates net worth and can be used to leverage new purchases.

Leverage

The use of borrowed funds from banks or other sources to finance the purchase of an investment. Leverage amplifies both gains and losses. The higher the leverage, the higher the risks and potential rewards.

Mortgage

A loan provided by a bank or lender to finance the purchase of a property. The property is the collateral, and the loan must be repaid over a fixed term like 20-30 years with interest. Mortgages allow investors to buy property with little upfront capital.

ROI (Return on Investment)

The percentage gain or loss derived from an investment. It is calculated by taking the net gain or net loss from an investment and dividing by the cost of investment. The higher the ROI, the better the investment has performed.

Stamp duty

A tax levied by the government on legal property documents like sales deeds, lease agreements, loan agreements, etc. It is usually a percentage of the property value or rental amount. Stamp duty payments must be made before filing such documents for registration.

Premium

The excess amount paid beyond the fair value of a property. Premiums are often paid by buyers when interest levels or competition to buy selected properties are high. Premiums lead to lower initial yields and a longer breakeven period.

Due diligence

The process of conducting a thorough review of all aspects of a property before purchasing including checking approvals, titles, valuations, condition, construction quality, rent rolls, leases, expenses, litigations, etc. Due diligence helps make an informed buying decision and minimizes risks.

Capitalization rate

The rate of return on a property based on the income it produces relative to the purchase price. It is calculated as net annual income divided by the cost of investment. The cap rate determines if a property is undervalued or overvalued and helps compare different investments.

Depreciation

Loss in the value of a property over time due to wear and tear, age or obsolescence. Depreciation reduces the useful life and value of a property but offers tax benefits like depreciation deductions.

Appreciation rate

The percentage at which the value of a property increases over a time period, usually one year. The appreciation rate is calculated based on the increase in value from the beginning to the end of the period divided by the value at the beginning of the period.

Moratorium

A waiting period after the completion of a new real estate project during which the developer cannot undertake any new project launches. It aims to prevent the market from becoming saturated and protects consumer interests. Imposed by governing authorities like RERA.

Carpet area

The usable area within a property which can be used exclusively, measured from the internal walls. Excludes walls, service shafts, balcony, etc. Used to determine the saleable area of a property.

Built-up area

The total area covered within a property including carpet area plus the outer walls, service shafts, balconies, etc. Built-up area defines the total constructed space and is larger than the carpet area.

Super built-up area

Built-up area plus common areas like lift lobbies, staircases, reception, gym, garden, swimming pool, etc. It is the gross area of an entire building or project. Charges for common areas are levied proportionate to super built-up area of each unit.

Freehold property

A property that is owned outright by the buyer for perpetuity and can be sold or transferred without restrictions. The buyer has absolute ownership rights over a freehold property.

Leasehold property

A property where ownership is transferred to the buyer for a fixed period of time, usually 30-99 years, after which the rights revert to the lessor. The buyer has limited ownership restricted by terms of the lease agreement.

Escrow account

An account operated by an escrow agent where funds from property buyers are deposited during the transaction process. Funds from the escrow account are released to the seller only after purchasers have secured property documents to their satisfaction. It protects buyer interests.

Encumbrance

Any liability or charge attached to a property like mortgages, liens, easements, litigations, taxes due, etc. that diminishes its unrestricted value. All encumbrances impact future sales or financing of the property. A property free of encumbrances is more attractive.

Zoning regulations

Laws that control the use of land and types of structures that can be built in specific areas according to designated zones. Zoning aims to organize development in a city and regulates aspects like land usage, building heights, floor space index, setbacks, parking, etc. Compliance is mandatory to avoid legal issues.