A Beginner's Guide to Real Estate Investment: Key Terms to Know

This glossary brings together the key concepts you need to get started in the world of real estate investment – or perhaps to refresh your memory on terms you are already familiar with. Learn these terms and you will gain a better understanding of the housing market, investment strategies, and the intricacies of housing companies.

A

• Airbnb: A US company that operates a global accommodation service online and via mobile apps. The service allows users to rent out their accommodation to travelers on a short-term basis.
• Subletting (re-letting): A situation where a tenant sublets part or all of their rented apartment to a third party. This usually requires the landlord's permission.
• Allocation: Distributing assets across different investment targets in order to diversify risk and optimize returns. In real estate investment, allocation can mean investing in different areas, different sizes of apartments, or combining with other forms of investment.
• Annuity loan: A loan repayment method in which each payment is the same amount throughout the loan period. The payment consists of both principal and interest. The interest portion is larger at the beginning and decreases as the loan is repaid. (In practice, this is the same as an equal installment loan.)
• Appreciation: An increase in the value of a property or apartment over time. This is influenced by location, economic conditions, renovations, and market conditions.
• Value appreciation strategy: A real estate investment strategy that primarily seeks long-term returns through the appreciation of property values.
• ASP account (Asuntosäästöpalkkiotili): A state-subsidized savings scheme for first-time home buyers. ASP savings entitle you to benefits such as interest subsidies.
• Real Estate Sales Act: A law that regulates the sale of real estate and defines the responsibilities of the buyer and seller.
• Mortgage: A loan intended for the purchase of your own home. The home serves as collateral for the loan.
• Housing fund: An investment fund that invests primarily in housing and real estate.
• Real estate investor: A person who purchases real estate for investment purposes, seeking returns from rental income and/or capital appreciation.
• Housing cooperative (Taloyhtiö): A type of company that owns a building. Shareholders own shares that give them control over a specific apartment.

B

• BRRR strategy (Buy, Rehab, Rent, Refinance, Repeat): A real estate investment strategy in which a property is purchased, renovated, rented out, refinanced, and the process is repeated.

E

• Advance inheritance: A gift that the testator gives to a descendant during their lifetime and which is taken into account in the distribution of the estate.
• First-time homebuyer: A person who is purchasing their first home. First-time homebuyers may be eligible for certain benefits, such as exemption from transfer tax under certain conditions.
• Euribor rate: The reference rate for the eurozone money market, which is commonly used as the basis for mortgage rates.

F

• Flipping: A real estate investment strategy in which a property is purchased, quickly renovated, and sold at a profit.
• Flipping property: A property intended for flipping.

H

• Right of control: The right to use and control certain property, such as an apartment in a housing cooperative.
• Board (of the housing company): The highest decision-making body of the housing company, elected at the general meeting. Responsible for managing the affairs of the housing company.
• Assumed acquisition cost: Assumption used in taxation for calculating capital gains on the sale of a home.
• Maintenance charge: A fee charged to shareholders of a housing company to cover the maintenance costs of the property.
• Property management service: A service in which an external party handles the landlord's duties.
• Good rental practices: Recommendations and guidelines for ethical and lawful rental management.

I

• Inflation: A rise in the general price level that weakens the purchasing power of money.
• Termination: Termination of the lease agreement within the notice period.
• Termination form: Document for formalizing the termination of a lease agreement.
• Property manager: A person/company appointed by the board of the housing company who is responsible for the administration of the housing company.
• Property manager's certificate: A document containing key information about the housing company and the apartment.

J

• Continuous income: Regular income from an investment, such as rental income.
• Subletting: See Subletting.

K

• Cash flow: The difference between the income (rental income) and expenses (maintenance charges, loan servicing costs) of an investment property.
• Fixed interest rate: The interest rate on a loan that remains the same throughout the loan period.
• Fixed installment: A loan repayment method in which the installments are of equal size, but the loan term may vary.
• Target analysis: Analysis of an investment target, including assessment of location, condition, return potential, and risks.
• Total interest rate: The actual annual cost of the loan, including the nominal interest rate and other costs.
• Interest: A fee charged by the lender for the money borrowed.
• Interest rate cap: A loan term that limits the maximum interest rate on a loan.
• Interest margin: The additional amount charged by the bank on top of the reference interest rate.
• Interest rate cap: A loan condition that sets both an upper and lower limit on the interest rate of a loan.
• Interest rate hedging: Ways to protect against the effects of interest rate changes.
• Interest deduction: The possibility to deduct loan interest expenses in taxation.
• Maintenance needs assessment (KPTS): The housing company's assessment of future repair needs (5 years).
• Condition inspection: An inspection of the condition of the apartment carried out by a professional.
• Deposit/reservation fee: The amount paid by the buyer in connection with the purchase of a home.
• Occupancy rate: The proportion of rental apartments that are rented out during a given period.
• Maintenance charge: Monthly fee payable for a right-of-occupancy apartment.
• Fair value: The probable price at which an asset would be sold in an arm's length transaction.

L

• Loan: Money that a lender gives to a borrower in exchange for certain conditions.
• Loan term: The period during which the loan must be repaid.
• Pipe renovation (pipe repair): Extensive renovation involving the replacement of the building's pipes.
• Redemption: The right to purchase property from another owner at a predetermined price.
• Redemption clause: A contractual term that gives shareholders, for example, the right to purchase an apartment that is being sold.
• Disposal loss: A situation where the sale price of an asset is lower than its acquisition price.
• Capital gain: A situation where the sale price of an asset is higher than its purchase price.
• Abbreviation: Loan repayment installment.
• Amortization-free period: A period during the loan term when only interest is paid.
• LTV (Loan-to-Value): The ratio of the loan amount to the value of the collateral (%). E.g., 70% LTV = 70% of the value of the home as a loan.

M

• Market price: The price at which the property would likely be sold on the open market.
• Market risk: The risk that changes in housing prices will affect returns.
• Market rent: The rent level prevailing in a given area for comparable apartments.
• Net migration loss: More people are moving away from the area than moving there.
• Net migration: More people are moving into the area than moving away.
• Selling price: The price at which the apartment is sold.
• Capital gain: Financial gain from the sale of a home (sale price – purchase price – selling costs).

N

• Negative cash flow: Rental income is insufficient to cover the costs of the apartment.
• Price per square meter: The price of the apartment per square meter.
• Net rental income: Rental income minus all apartment maintenance costs.
• Nominal interest rate: The interest rate on the loan before expenses are taken into account.

O

• Equity: The investor's own funds for purchasing a home.
• Return on equity: The return received by investors in relation to their equity.
• Self-financing share: The portion of the apartment price that the investor finances themselves.
• Share certificate: A document certifying ownership of shares in a housing company.
• Buy and hold strategy: A long-term strategy in which a property is purchased for long-term ownership.
• Buy and sell strategy: A short-term strategy in which a property is purchased, renovated, and sold quickly.
• Purchase price: The price at which the apartment was originally purchased.

P

• Passive income: Income without active work, e.g., rental income.
• Surface renovation: Replacement of surface materials in the apartment.
• Positive cash flow: Rental income exceeds apartment expenses.
• Prime rate: The bank's own reference rate.
• PTS (long-term plan): The housing company's plan for future repairs (10 years).
• Capital: Assets that can be used for investment.
• Capital loan: A loan where only interest is paid, not capital. The capital is repaid at the end of the loan period.
• Capital income: Income from the use or sale of capital.
• Capital gains tax: Tax on capital gains.
• Capital contribution: See Financial contribution.

R

• Financing: Use of a loan or other financial instrument to purchase an investment property.
• Financial contribution (capital contribution): The portion of the contribution that covers the housing company's loan servicing costs.
• Real price: Price adjusted for inflation.
• Renovation: Repair work on a property or apartment.
• Risk: The possibility that an investment will not perform as expected or that the investor will lose capital.
• ROI (Return on Investment): Return on invested capital. (Return / Invested capital).

S

• Renovation: Extensive repair and refurbishment work.
• Investment property: A property acquired to generate rental income and/or capital appreciation.
• Investment property loan: Loan for purchasing an investment property.
• Investment strategy: A plan that defines objectives, risk level, and investment targets.
• Styling: Improving the interior design of an apartment for sale/rent.

T

• Financial independence: A situation where passive income covers expenses.
• Housing company (Asunto-osakeyhtiö): See Housing company.
• Housing association loan: A loan taken out by a housing association, e.g., for renovations. The shareholders pay back the loan through their maintenance charges.
• Balance sheet: An accounting report on assets, liabilities, and equity.
• Fixed-rate loan: A loan repayment method in which each payment installment is the same amount.
• Fixed repayment loan: The loan principal is repaid evenly, with payment amounts changing as interest rates fluctuate.
• Auditor: Audits the housing company's financial statements and accounting.
• Audit: A process that verifies the accuracy of financial statements.
• Operations inspector: An alternative to an auditor in smaller housing companies.
• Operational audit: Focuses on the housing company's operations and decision-making.
• Actual annual interest rate: Total annual cost of the loan, including all expenses.
• Return: The benefit gained from an investment.
• Expected return: An estimate of the return on an investment over a specific period of time.

U

• New property: A newly built or under construction apartment/property.
• Refinancing: Reorganizing a loan or taking out a new loan to replace an old one.

V

• Collateral: Assets/commitments that secure the repayment of a loan.
• Collateral value: The value of assets accepted as collateral for a loan.
• Collateral shortfall: The value of the assets securing the loan is insufficient to cover the loan.
• Transfer tax: Tax on the purchase of real estate or apartment shares.
• Contribution: A fee charged to shareholders to cover the company's expenses.
• Contribution financing calculation: Calculation of the adequacy of contributions.
• Tax planning: Planning tax-related matters in advance to minimize the amount of tax payable.
• Debt-free price: The price of the apartment without any debt attached to it (e.g., a mortgage).
• Leverage: The use of borrowed money in investments to increase the return on equity.
• Reference rate: A publicly quoted interest rate used as a basis for determining loan interest rates (e.g., Euribor, Prime).
• Rent: The payment that a tenant pays to a landlord for the use of an apartment.
• Tenant: A person/entity who rents an apartment.
• Landlord: The person/entity that owns the apartment and rents it out.
• Rent increase: An increase in the amount of rent charged by the landlord.
• Rent increase notice: Notice of rent increase (in writing).
• Lease agreement: Agreement between the landlord and tenant (terms and conditions of the lease).
• Rent level: The general price level of rents in a specific area/for specific types of housing.
• Leased plot: A plot of land that has been leased. For example, a housing company pays rent to the owner of the plot.
• Rental plot fee: The portion of the fee that covers the plot rent paid by the housing company.
• Rental yield: The return on investment from rental income in relation to the value of the apartment (%).
• Rental deposit: The amount paid by the tenant at the beginning of the tenancy (security deposit).

Y

• Articles of association: The "constitution" (operating principles) of the housing company.
• General meeting: Meeting of the shareholders of a housing company (decisions on matters concerning the housing company).
• Company loan: A loan taken out by a housing company, e.g., for renovations. The shareholders pay off the loan through their maintenance charges.
• Company charge: The sum of the maintenance charge and any financing charge.
• Extraordinary general meeting: A meeting of the shareholders of a housing company, held when necessary in addition to the annual general meeting.