Whilst experienced Investors and Industry Specialists easily rattle off the industry lingo and terminology, property investment can be a daunting experience and learning curve for the new investor.
Listed are some common terms and meanings that will have you speaking, and understanding, the industry like a pro in no time:
APPRAISAL – An estimate of price of a residential property provided by a licensed Real Estate Agent. Appraisals are an opinion only, are generally free and have no legal standing.
BUYER’S MARKET – A situation in which the property supply exceeds demand, giving purchasers an advantage over sellers in price negotiations. The opposite of a buyer’s market is a seller’s market, a situation in which demand exceeds supply and owners have an advantage over buyers in price negotiations.
CAPITAL GAIN – The amount by which the net proceeds from the resale of a capital item exceed the book value of the asset. In simpler terms capital gain (or loss) is the difference between what you paid for your investment property and what you sell it for minus allowable expenses. As there are many factors involved, always consult your accountant when calculating capital gains.
CAPITAL GROWTH – The increase in the value of your property, or portfolio of properties, over time. Your capital growth is the amount that your property has increased in value by, or the difference between the purchase price (or market value price) and the current estimated value or prospective selling price.
CASH FLOW POSITIVE – A property that is cash flow positive returns a positive cash flow after tax deductions are taken into account, whereas a positively geared property returns an income regardless of tax deductions.
DEPRECIATION – The decrease in value of an item over time, for example a building. When it comes to Investment properties, depreciation can be your friend as you may claim against the depreciation of your investment property.
EQUITY – The interest or value that an owner has in an asset over and above the debt against it. For example, a home-owner has equity in that part of the value of his or her property above the amount borrowed from a lender. Equity can be used to leverage into further property purchases.
FITTINGS – A term used to describe installed items that may be removed from a property without causing irreparable damage to the land, structure or use of the premises.
FIXTURES – Those parts of a property affixed to structures or land, usually in such a manner that they cannot be independently moved without damage to themselves or the property pertinent to them. Fixtures are usually included in a sale and commonly include items such as carpets and awnings.
GEARING – The term refers to borrowing funds to invest, as an example, a rental property. Negative gearing occurs when the expenses on your investment are higher than the income you receive. If your investment is making a loss you may be able to offset your expenses against other income such as your salary, potentially reducing your tax. Positive gearing occurs when your rent from your investment property is higher than costs such as loan repayments, interest, property maintenance and rates. You may be subject to additional tax on any income derived from a positively geared investment.
GUARANTOR – A person who undertakes to fulfill a contract if the main party defaults.
LVR (loan-to-value ratio) – The amount you are borrowing, represented as a percentage of the value of the property being used as security for the loan. Lenders place a large emphasis on the LVR when assessing your loan application. The lower the LVR, the lower the risk is to the bank. LVR can be calculated by dividing the loan amount by the actual purchase price or valuation of the property, then multiplying it by 100.
MEDIAN – The median house price is the middle price of all sales recorded in a particular suburb, postcode, city or state. If there were 100 sales in a particular suburb, in ascending order, the median would be number 50 on the list. It’s commonly assumed that the median price is the same as the average price, but that’s not the case.
OFF THE PLAN – When you buy off the plan, you are buying a property before it is built, having only seen the plans. This is commonly used for apartments or units under construction or about to be built.
TURN KEY – In real estate the term is used to describe a property that is built ready for occupation with nothing further to complete. Many builders offer ”full turn-key” properties to include items such as driveways and landscaping etc at one fixed cost. This suits most investors as the end user (the tenants) just have to turn a key to start utilising the property.
VACANCY RATE – The rental vacancy rate is an economic indicator that measures how many dwellings are available for rent over a specified time period. Most often it is used to determine rental demand. A low vacancy rate means there are not very many dwellings available for rent, while a high vacancy rate means there is ample supply of rental properties. A 3% vacancy rate is the point at which a market is set to be evenly balanced between landlords and renters.
VALUATION – A valuation involves a formal process that determines the actual value of a property from an independent and impartial point of view. The valuation is conducted by a qualified Valuer for a fee and may have a legal standing.
YIELD – A yield is a measurement of future income on an investment. It is generally calculated annually as a percentage, based on the asset’s (or investment’s) market value. A gross yield is the income on an investment prior to expenses being deducted. The net yield is the income on an investment after expenses have been deducted. To calculate: Gross rental yield = Annual rental income (weekly rental income x 52) / property value or valuation x 100.
Property Investment can be an intimidating and confusing business, consult your Innovatus Professionals and Specialists prior to making any investment decisions.