Within the property investing arena exists a range of terminology which for newcomers, can be quite confusing and somewhat intimidating.
We have put together a glossary so you can bring yourself up to speed on some of the commonly used terms within the industry.
Capital gain/loss: The difference between the purchase price of an asset and the price at which it is sold. For example, if you purchase a property for $400,000 and it is now worth $500,000 you have made a capital gain of $100,000. Conversely, if you purchase a property for $400,000 and it is now worth $300,000, you have made a capital loss of $100,000.
Cash rate/bank rate: The cash rate is set by the RBA and determines the interest rate which financial institutions pay to borrow or charge to lend funds in the money market on an overnight basis. The bank rate is the interest rate passed onto the consumer and is above the cash rate to allow for profit margin.*
Cash flow positive: If your earnings are more than your outgoings after tax-deductible items have been claimed, then you have a cash flow positive investment. This often means your rent exceeds your mortgage repayments and you are still ahead after taking into account expenses such as interest on the loan, insurance rates and so on.
Capital Gains Tax: If you make a profit from the selling of your property, you must pay a tax on that profit.
Conveyancing: The transfer of legal title of property from one person to another.
Cross-securitisation/cross-collateralisation: A form of loan structuring where more than one property is used to secure a loan. When investing, your current property is used as ‘security’ for the other property you want to buy.
Density: The level of occupancy in a given area, or the number of people permitted to reside in an area. For example, inner-city areas are usually higher density than outer-suburban areas.*
Depreciation: The reduction in value of an asset over time due to wear and tear. The ATO allows property owners to claim the depreciation of their assets (e.g. building) as a deduction if they obtain an income from the property.
Equity: Equity is the difference between what your property is worth and the amount you have owing on it. For example, if your home is worth $500,000 and you have $200,000 owing on the loan, then you have an equity of $300,000.
Median: Median house price is the midway point of all of the houses/units sold in a particular suburb, postcode, city or state over a set period of time.
Negative Gearing: Negative gearing is when the costs of owning a property such as interest on the loan, bank charges, maintenance, insurance, repairs and capital depreciation exceed the income it produces. This method is particularly popular for high income earners as they can claim the shortfall as a loss when submitting their tax return, therefore reducing their taxable income.
Off the plan: When buying a property off the plan, you are signing a contract to purchase a property which is yet to be built or under construction based upon viewing the plans.
Portfolio: A property portfolio is a collection of property investments owned by an individual, group or company.*
Positive gearing: Positive gearing is when the income you receive from the investment exceeds the expenses of owing the property, and any other possible deductions. For example, you may receive $900 per month for rent but the monthly repayments are only $700.
Rental yield: The return on investment as a percentage of the amount invested. Gross yield= annual rental income (weekly rental x 52) / property value x 100.
Serviceability: The ability of a borrower to meet loan repayments based upon the loan amount, the borrower’s income and other expenses and commitments.
Stamp Duty: The tax imposed by the Government on the transfer of property which is calculated based on the value of the property.
Vacancy rate: Usually expressed as a percentage, the vacancy rate is a statistic used to assess activity in an area or rental demand. It is measured by how many properties are available for rent over a specific period of time. A high vacancy rate means there is a large supply of rental properties available while a low vacancy rate indicates there a few properties available for rent.
Yield: A measurement of future income or return on an investment. Generally calculated annually as a percentage and based upon the cost or market value of the investment.
If you would like more information regarding property investment, please contact us to arrange an appointment.*Glossary – Reserve Bank of Australia
*Glossary – Australian Property Investor
*What is a Property Portfolio and What Are the Benefits? – On Property