Buying a property can be daunting and confusing, especially for first-time property investors who are trying to create a revenue stream as well as a beautiful home for tenants or a future buyer. Our property investment glossary will help you understand some common terms you’ll hear along your property investment journey.
The increased value of a property or other asset over time. Appreciation takes place for a number of reasons, including market trends, demand, improvements and upgrades.
The amount of money you gain through selling your property compared to your original purchase price. Your property is referred to as a capital purchase, and the increase in value is the gain. If you purchased your investment property for $600,000 and after 12 months you sell the home for $700,000, you have made a capital gain of $100,000.
The decrease in value of a property or other asset over time. This is the opposite to ‘appreciation’. When an investment property depreciates it could be used as a tax deduction.
The difference between your property’s value and the amount owing on your property’s mortgage. If your property is valued at $600,000 and you owe $400,000 on your mortgage, then you have $200,000 in equity. This equity will increase as you repay the loan and/or as the value of your property increases. Your equity may be able to be leveraged for further purchases and loans as required.
Negative gearing occurs when the expenses associated with owning your investment property are higher than any income received from the property. While the long-term property investment goal is to make a capital gain, negative gearing can allow you to use your investment property expenses as a tax deduction.
When the income received from your investment property more than covers the expenses associated with owning the property, this is called positive gearing. The profit made from owning the investment property is classed as taxable income, and so you will be required to pay tax on it.
Working from a real estate rental office, a property manager takes care of your investment property for you for a fee when it comes time to rent it out. From finding the right tenant, collecting rent, keeping an eye on your property, and arranging repairs and maintenance, property managers are a valuable resource when you rent out your property.
The return on investment you can expect from your property as a percentage of the purchase amount or amount invested. You can find your expected gross (before tax) annual rental yield by considering the weekly rent amount multiplied by 52 weeks (one year), then divide by the purchase price of the property, and finally multiply by 100 to find the percentage. For example, if you were to buy a property for $600,000 that will generate $500 rent per week, the gross rental yield calculation would look like this: Gross rental yield = (500 x 52) / 600,000 x 100 = 4.3%.
This is a government tax that must be paid when you purchase a property. It is now known as land transfer duty. The amount of tax payable is based on the purchase price of the property and can vary based on your first home buyer status and whether or not you are buying off the plan among other factors. Learn more and use the calculators to estimate this figure via the State Revenue Office Victoria website.
If you need additional support with navigating property investing and how to approach building an investment property, the Fairhaven Homes team can help. Contact us to chat about what’s what in property investing and make informed choices for your future. In the meantime, take a look at our additional property investing resources here.
The information contained in this article is intended to be of a general nature only. It has been prepared without taking into account any person’s objectives, financial situation or needs. Before acting on this information, Fairhaven Homes recommends that you consider whether it is appropriate for your circumstances and that you seek independent legal, financial, and taxation advice before acting on any information in this article.