Investing in Real Estate: Key Terms
By Erica Garcia

(MONEY Magazine) – Few investments fuel our dreams of getting rich the way real estate does. But before you embark on this time-consuming and potentially risky path to wealth, it pays to know the lingo and strategies --ERICA GARCIA


Flipping Buying, fixing up and Live there two of selling a house, all five years and within a few years or $250,000 gain is less; serial renovations tax-free ($500,000 . for couples). [You may not recoup the cost of all costly renovations. Steeper taxes if you sell in a year or less.]

The 14-day rule The tax rule that applies If you rent for no to a vacation or future more than 14 days a retirement home that you year, the income is rent out. tax-free. [If you rent for more than 14 days, the income is taxable (but some expenses are deductible).]

Land speculation Buying with the intention They're not making of building on the property more of it. Few or flipping bare land. real estate deals stir the imagination more. [More risky than developed property (are there roads? power lines?). Financing is tough to get.]

Lease option Giving renter an option Allows seller to to buy at a fixed date postpone a sale and price. Rent can go (maybe for tax toward the sale. reasons), but lock in a price. [If real estate prices go up during the lease, you could lose out on potential gains.]

Rondo Conversion of multi-unit If the rental market rentals into condominiums; is soft but prices sell to tenants or new are high, a way to owners. forgo cash flow but book a gain. [Complicated zoning laws. Legal costs to draft a prospectus. Process can take six to 18 months.]

Seller financing When seller, not a bank, Sellers often lends the money for the charge a percentage deal. Also known as owner point more than financing. 30-year fixed-mortgage rate. [You can't charge too much (state usury laws) or too little (IRS gift rules) in interest. You must collect.]

Short sale A lender accepts an offer The price could be during foreclosure for lower than if you less than the outstanding bought at a balance. foreclosure sale. [This is time-consuming work, akin to prospecting, that may never pan out.]

Tenancy in common Shared ownership (up Tax breaks and to 35 shareholders) of a income. For about residential or commercial 3% of rent, a property. Manager takes over landlord duties. [Gridlock. Decisions on important economic or material issues generally must be unanimous.]

1031 exchange A way to defer taxes on You roll your gains the sale of investment from the sale of property; also, property into like-kind exchange. Another one of equal or higher value. [Strict deadlines on the timing of the sales. Must hire a qualified intermediary to handle the deal.]