Terms you need to know
Buying a property can be daunting and confusing, especially for first-time property investors who are trying to create an income profile and a beautiful design-forward home for tenants or a future buyer.
I want to share with you a glossary of terms. There are many out there; some focused on terms specific to legals and contracts, some more on finance and the bank’s perspective, and most on the home buyer. I particularly want to focus on a glossary of terms for the investor, especially the new property investor.
Here is a list of common investment glossary terms you will probably hear along your property investment journey. What can you add?
Appreciation
The increased value of a property or other asset over time. Appreciation takes place for a number of reasons, including market trends, demand, improvements and upgrades, economic drivers, and especially supply and demand dynamics in the market
Capital Gain
The selling price of your property minus the original purchase price. Your investment property is an operating asset with income and expenses and is subject to taxation for operation income (rent income minus property expenses) as well as the appreciation or gain of the value of the property between the time of purchase and sale. Property is referred to as a capital purchase, and the increase in value is the gain. If you purchased your investment property for $400,000 and after 12 months you sell the home for $500,000, you have made a capital gain of $100,000 (remember to ALWAYS speak to your accountant or any other professional body regarding the tax implications for your investments)
Depreciation
Depreciation is the natural wear and tear of property and assets over time. There are 2 types of depreciation: the eligible structure and fixed assets of a property (capital works) and easily removable and mechanical assets (plant and equipment). As one of the highest tax deductions available, depreciation can make a significant difference to an investor’s cash flow. (remember to ALWAYS speak to your accountant or any other professional body regarding the tax implications for your investments)
Equity
The difference between your property’s value and the amount owing on your property’s mortgage. If your property is valued at $500,000 and you owe $375,000 on your mortgage, then you have $125,000 in equity. But be cautious here, because if you want to use that equity for a future purchase the bank or lender will apply a 20% hold on that equity portion, allowing you access to the “net equity”, subject to all terms and conditions of that lender. This equity will increase as you repay the loan and/or as the value of your property increases. Your equity may be able to be leveraged for further purchases and loans as required. (remember to ALWAYS speak to your mortgage broker or any other professional body regarding the financial implications for your investments)
Negative gearing
Negative gearing occurs when rental income for your investment property is less than the expenses associated with owning that investment property, in a financial period. While the long-term property investment goal is to make a capital gain, negative gearing can allow you to use your investment property expenses as a tax deduction. (remember to ALWAYS speak to your accountant or any other professional body regarding the tax implications for your investments)
Positive gearing
Positive gearing occurs when rental income for your investment property is more than the expenses associated with owning that investment property, in a financial period. The profit made from owning the investment property is classed as taxable income, which will be added to your total income in and taxed. Much the same if you trade stocks and make a profit. It’s taxable.
Property Manager
Working from a real estate rental office, a property manager takes care of your investment property for you for a fee when it comes time to rent it out. From finding the right tenant to collecting rent, keeping an eye on your property, and arranging repairs and maintenance, property managers are a valuable resource when you rent out your property.
Rental yield
The return on investment you can expect from your investment property is a % of the purchase price of the property. You can calculate the expected gross rental yield as follows: weekly rent amount multiplied by 52 weeks (in a year), divided by the purchase price of the property and multiplied by 100 to find the percentage. For example, if you were to buy a property for $500,000 that will generate $450 rent per week, the gross rental yield calculation would look like this: Gross rental yield = (450 x 52) / 500,000 x 100 = 4.68%. Gross rental yield means the total amount before tax is deducted.
Stamp duty
This is a government tax that must be paid when you purchase a property. It is now known referred to as land transfer duty. The amount of tax payable is based on the purchase price of the property and can vary based (1) the state in which you purchase the property (2) the entity in which you purchase your property (3) your first home buyer status and (4) whether or not you are buying off the plan; these 4 are among other factors but are the main ones to consider at the outset. Learn more and use the calculators to estimate this figure here. Remember to ALWAYS consider the terms of the stamp duty department per State.
PLEASE NOTE:
The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, please consider whether it is appropriate for your circumstances and that you seek independent legal, financial, and taxation advice before acting on any information in this article.
