Principal in Real Estate§
Definition§
The term “Principal” in real estate can have multiple interpretations based on the context:
- Property User or Owner: The individual who owns or will use the property. For example, the principals to the lease are the landlord and tenant; principals to a sale are the buyer and seller.
- Client of Broker/Agent: The one who contracts for the services of an agent or broker. This individual is often referred to as a client. For instance, if a person engages a broker to arrange financing, that person is considered the principal.
- Loan Amount: The amount of money borrowed in a mortgage, distinct from the interest paid. For example, if a loan is secured for $100,000 at 6% interest, the $100,000 is the principal.
Examples§
- Property Owner/User: In a residential lease, the principal parties are the landlord and the tenant.
- Client of Broker/Agent: Grey wishes to purchase a shopping center and engages Jamison, a mortgage broker, to arrange financing. Jamison arranges a loan in the name of the principal, Grey.
- Loan Amount: Abel secured a home loan with a $100,000 principal amount at 6% interest. The initial payment includes both interest and an amount that amortizes the principal.
Frequently Asked Questions (FAQs)§
What does it mean to be a principal in a real estate deal?§
Being a principal means being a primary party to the transaction, such as the owner, buyer, seller, landlord, or tenant. It also refers to someone who engages the services of an agent or broker for tasks like purchasing property or arranging financing.
Who are the principals when leasing a commercial property?§
The principals in leasing a commercial property are the landlord (lessor) and the tenant (lessee).
How does the principal in a loan differ from the interest?§
The principal is the original amount of money borrowed in a loan, while the interest is the cost of borrowing that money. The principal tends to reduce over time with scheduled payments, assuming an amortizing loan structure.
Why is it important to know the principal amount in a mortgage?§
Understanding the principal amount in a mortgage is crucial because it determines the initial debt one has taken on and is essential for calculating subsequent interest payments and amortization schedules.
Related Terms§
Interest§
Interest is the cost paid for borrowing money, usually expressed as an annual percentage of the principal.
Amortization§
Amortization is the process of spreading out a loan into a series of fixed payments over time. Each payment includes both interest and a portion of the principal.
Balloon Payment§
A balloon payment is a large, one-time payment at the end of a loan period, used to pay off the remaining principal on the loan.
Client§
A client is an individual or entity that hires a broker or agent for services like buying, selling, or financing a property.
Online Resources§
- Investopedia – Principal Definition: Link
- IRS – Mortgage Interest Deduction: Link
- Consumer Financial Protection Bureau – Understanding Amortization: Link
References§
- Real Estate Principles, Charles J. Jacobus
- Modern Real Estate Practice, Fillmore W. Galaty, Wellington J. Allaway, Robert C. Kyle
- Fundamentals of Real Estate, David C. Ling, Wayne R. Archer
Suggested Books for Further Study§
- Real Estate Finance & Investments by William B. Brueggeman and Jeffrey D. Fisher
- The Simple Path to Wealth: Your road map to financial independence and a rich, free life by JL Collins
- Residential Mortgage Lending: Principles and Practices by James J. Lacko
