If you’re new to the property investment world, you may find yourself a little bit confused by all the terminology used, and you may feel intimidated or embarrassed to ask what it all means. Understanding everything about your property investment purchase is important, so to help you out, we’ve explained some of the most common property investment terms:
This refers to the profit made from the sale price of your investment property, minus the purchase price. For example, if you bought a property for $200,000 and it’s now worth $350,000, you’ve potentially made a capital growth of $150,000.
Negative gearing occurs when the rent from your investment property is not enough to meet the running costs of the property (such as loan repayments, council rates, or strata fees). The Australian Taxation Office then allows you to claim deductions against your taxable income.
Positive gearing is basically the opposite of negative gearing – when the rent from your property is more than the costs (such as loan repayment, council rates, or strata fees). This happens when the rent return is higher than normal, the loan borrowed is minimal, or when interest rates are very low.
An off-the-plan apartment refers to the purchase of a property that hasn’t been built yet – you’ve seen plans, but will be unable to inspect the property until it is completed. There are often savings associated with purchasing properties off the plan.
Over time, your investment property decreases in value – this is called depreciation. It is important to get a depreciation schedule prepared to cover wear and tear, particularly for things like blinds, carpets, and air conditioners.
This refers to how much cash a rental property generates each year as a percentage of the rental property’s value. For example, if the rental income for the investment property is $350 per week, and the purchase price is $400,000, then the yield is (350×52)/400000 = 4.55%.