Terms you need to know
Buying a property is daunting and confusing, especially for first-time property investors.
There are many glossary terms out there. Some are focused on terms specific to legals and contracts. Others are more on finance and the bank’s perspective. Most are on the home buyer or the investor purchasing property to enhance a portfolio.
Here is a list of common investment glossary terms you will probably hear along your property investment journey. What can you add?
Appreciation
Appreciation is the increase in value of a property over time. It is triggered by market trends, demand, improvements and upgrades, as well as economic drivers such as supply and demand dynamics in the market.
Capital Gain
Capital gain = selling priceless original purchase price.
Your investment property is an operating asset with income and expenses. Profits are subject to taxation, added to your income earned for the financial year and taxed at your marginal tax rate.
Tax is calculated on your 1. net operational income and 2. the capital gain from purchase to sale. Property is referred to as a capital purchase, and the increase in value is the gain. For example: 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
Equity is calculated as: property’s value less mortgage balance. If your property is valued at $500,000 and you owe $375,000 on your mortgage, then you have $125,000 in equity. If you want to use that equity for a future purchase the bank or lender will apply a 20% hold on the equity portion if you refinance and draw the equity out as a deposit for a new property purchase.
This, allows 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 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 is less than 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. 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 government tax must be paid when you purchase a property. It is also referred to as land transfer duty. Tax payable is based on the purchase price of the property and can vary based (1) which state you purchase the property in (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.
