Within the world of property investment, there is a lot of jargon and key terms you will need to become familiar with. Initially, it can be quite overwhelming and these complex terms may even leave you confused. However, fear not, we’ve put together the following comprehensive list explaining the most common terms and concepts to aid you in your journey.
One of the most common terms you’ll hear is ‘equity’. Essentially, equity is the difference between the value of your property and the value of the loan, or debt, you have against the property. For example, a property owner with a $700,000 property and a $400,000 loan, has $300,000 in equity. Generally, a lender will allow an owner to access 80% of this equity.
Your equity can increase if the value of your home rises or if your loan balance decreases. To access the equity, you’ll need to refinance, which can mean either increasing the size of your current loan or taking out a second loan against the property.
Another common term you’ll come across is capital growth, or capital gains. Capital growth is the value, or amount, that a property increases in value, relative to what it was initially purchased for. For example, say an investor purchased a property in January, 2020 for $300,000. If in January, 2021 (12-months later) that property is now worth $360,000, that investor will have $60,000 equity in the property. The investor could then borrow against this capital gain – this is also known as accessing equity – to either renovate, extend or buy an additional investment property.
Loan to Value (LVR)
Once you have understood equity and capital growth, the next term to get across is Loan to Value. Most of us will have to obtain a loan to purchase a property. LVR stands for loan-to-value ratio and is a common term used by lenders when assessing your loan application. Essentially, it’s the percentage of money you need to borrow, as compared to the value of the property. An LVR will go down if the loan balance decreases, or the property value increases (i.e. capital growth).
Generally, lenders prefer LVRs within 80% – so you would need a 20% deposit to complete the purchase transaction. Even if you don’t have a 20% deposit, you can still proceed with the purchase, however you are likely to be subject to Lenders’ Mortgage Insurance (LMI). Keep in mind, LMI protects the lender, and not the borrower.
Rental Income & Rental Yields
When you start researching investment properties, it’s very important to consider rental income and the associated rental yield. Rental income refers to how much income a property can generate per week, or per month. A rental yield refers to the rental income, as a percentage of the property’s value. Generally, it is favourable to have a higher rental yield. It’s important to understand, properties with higher land content, generally tend to have a lower rental yield.
Rental yield is calculated by dividing the annual, or yearly, rental income by the value of the property. For example, a $600,000 property rented for $450 per week, would generate an annual rental income of $23,400, which is a gross rental yield of 3.9%. This would be considered an average or good rental yield.
Negative and Positive Gearing
Gearing is a term used to describe when an investor borrows money to purchase an investment property. An investment property can be either negative geared, or positive geared.
Essentially, negative gearing is when all the investment property expenses – such as the interest repayments, insurances, rates and maintenance and repair costs – exceed the total income being received. For example, say you earn $20,000 in rental income and your expenses add up to $30,000. The property would then be negatively geared, by $10,000 per annum.
For the owners of the investment property, this “loss” could potentially provide a significant tax break, which is why negative gearing is an extremely popular strategy with property investors.
Positive gearing is the opposite of negative gearing. It’s when the total income on a property is greater than all the associated expenses. This could provide you with an income, and for many property investors, this ultimately is the “end-goal” – to have a consistent income stream to fund a lifestyle.
Always seek advice from a trusted professional.
Purchasing and investing in real estate is exciting and when done well, can significantly transform your life. Your local One Agency specialist, lives and breathes real estate in your area and has insights into exactly what is happening in your community.
Now is a great time to get started on your property journey, or continue climbing the property ladder, as interest rates are at an all-time low. Our agency is also seeing high-quality family-oriented supply begin to come onto the market, and this is set to continue as we progress through Spring and approach Summer.
To learn more about the benefits of real estate investing and what prices may do long-term, please contact us at One Agency. With One Agency being one of Mildura’s most trusted real estate agencies, we are well placed to provide you with our view of the current market based on our local experience. We’ll thoroughly guide you through the process and help you take advantage of this opportune time in the property market.