20 Key Property Terms
If you’re a newcomer to the property investing or home buying market, you may find that the jargon can get slightly confusing. It is really important to have a solid understanding of property investment terms so that you know exactly what is being said. Instead of being baffled the next time you hear these terms, we have provided a simple guide to some of the most commonly used words and phrases to get your head around.
Here are our Top 20 Property Investment terms explained in simple English.
1) Capital Gain
This is the amount by which your property has increased relative to the price you paid for it. For example, if you bought a property for $350,000 ten years ago and it’s now worth $500,000, then you’ve made a capital gain of $150,000.
2) Capital Gains Tax (CGT)
The tax you pay when you sell your investment property if you’ve made a profit. You do not pay this if your property has made a loss.
3) Cashflow Positive
If your income from your investment property is more than your outgoings after tax deductions then your property is cashflow positive. Tax deductions include depreciation, interest paid on your loan, maintenance and service costs.
This is the legal process of transferring the ownership of a property from one person to another. This process can be carried out by various people including a conveyancer, property solicitor or a settlement agent.
This is the loss in value of an item over time, such as a building. For investment properties you can claim against the depreciation of your property.
The difference between what your investment property is worth and how much you still owe on it. For example, if your property is worth $500,000 and you still owe $200,000 then you have $300,000 in equity. As you reduce the amount you owe over time, or the property increases in value, your equity increases too.
7) Interest-Only Loans
A loan where just the interest is paid and the principal is paid at the end of the term.
To use the growth in any one investment or in borrowed capital in order to increase the potential return of another investment. For example, borrowing money from a bank as a mortgage to buy a house which you could not otherwise afford.
9) Loan-to-Value-Ratio (LVR)
This is the amount of money that you borrow compared to the value of the property. Before lenders give you the money required to purchase a property they need to look at your LVR to assess your risk as a borrower.
Lenders will typically have a maximum LVR in place for certain loans such as 80% for an equity loan for investment properties. The higher your LVR, the higher risk you are to a lender.
10) Negative Gearing
This is when your incomings are less than your outgoings after all tax deductions have been claimed. For example, you rent a property for $500 a month, but the mortgage repayments are $600 a month. You are left with a shortfall of $100 a month that you have to pay. You can claim this as a loss when doing your tax return, and many high income earners use negative gearing to reduce their taxable income.
11) Off the Plan
This is a property that has yet to be built and you enter into a contract by looking at floor plans, artist impressions and price lists. It can offer great capital gains if bought in a growth area.
12) Owner Occupied
A property that the owner lives in and is not producing an income.
13) Positive Gearing
This is the opposite of negative gearing and is when your property income exceeds the expenses and you are making money on the property. For example, the rent you receive is $600 a month, but the monthly repayments are only $450. Keep in mind though that if the property is positively geared, you may have to pay tax on this income.
The original amount of money that has been borrowed and does not take into account the accruing interest.
15) Rental Yields
This is the return on an investment as a percentage of the amount you have invested. Gross rental yield is calculated by multiplying the weekly rent by 52, then dividing by the value of the property and multiplying this figure by 100 to get the percentage.
16) Self-Managed Superannuation Fund (SMSF)
This is a type of superannuation fund that provides you with a greater level of control over your retirement savings and can be used to buy investment property. Unlike other superannuation funds, you are in charge and responsible for complying with tax and super laws.
The completion of sale when the remainder of the contract price is paid to the vendor and the buyer is now the legal owner of the property.
18) Stamp Duty
A tax imposed by the state government for the sale of real estate as well as other transactional types and differs depending on the state you live in. If you are a First Home Buyer you may be entitled to stamp duty concessions.
19) Sunset Dates
The day by which the developer is able to fulfil their obligations as stipulated in the contract. A Sunset Date is always at least 24 months, but can be up to 48 months after the anticipated date of completion and settlement for the property.
20) Vacancy Rates
A measure of how many homes are available to rent over a certain time period. A low vacancy rate means only a few homes are available to rent, whilst a high vacancy rate means that there are plenty of rental properties available.
We hope that these terms make understanding and investing in property a little easier. Remember, this is not a complete list, so if you are serious about buying an investment property, it is worthwhile nailing these terms before tackling others.
Published on 23rd of October 2014 by Marty Stanowich