australian property investing

One of the things that makes learning about property investing (or any topic for that matter) so daunting can be the barrier to understanding that occurs where jargon and terms are used with which we are unfamiliar. Let’s try to clarify a few of those terms that you will see when reading about property investment or listening to others speaking about property investment.

Capital Gain
Residential Property Investing - Capital gain The amount by which a property increases in value relative to the amount for which is was purchased. So as an example if you bought a house for $150,000 in 1995 and now the house is valued at $650,000 then your capital gain is $500,000 (well done, you!).
Capital Gains Tax (CGT)
Residential property investment - capital gains tax Yes, so just when you were thinking up all of the ways you would spend your $500k capital gain we made in the previous example, CGT comes along and grabs part of your profit! CGT is the tax that you pay when you something that has made a capital gain. It gets included in your income tax return. In regard to property investment we’re talking about the tax you pay on any capital gain that you make when you sell a property. Your principal place of residence has an exemption from CGT, however, there are specific rules around this that you should consult a tax advisor about if you need to know more.
Cashflow positive
Residential property investment - Cashflow positive Ahhh, I love these words! Your investment property is cashflow positive if your income from this property is greater than your outgoings after you’ve taken into account tax deductions. Tax deductions include things like interest paid on your loan, depreciation, maintenance and service costs.
Residential property investment - depreciation This is the decrease in value of an item over time. The easiest example of a depreciating asset is your car, one minute you’ve just purchased a brand new shiny number and driven it off the car sales lot, the next minute you own a second hand that’s worth a whole lot less than you paid for it! Now when it comes to investment properties depreciation can be your friend, because you are allowed to claim against the depreciation of your investment property. Once again there are some particular rules around this so you should speak to your accountant or a qualified depreciation specialist. There are many companies around who can help you.
Residential property investment - Equity This is the degree or proportion of ownership that you have in something. In the case of property, it’s how much of the property you own. So if you have a property that is worth $200,000, of which you still owe $120,000 then you would have $80,000 or 40% equity. Equity is a very good thing to have as it can be used to leverage into further property purchases!
LVR (Loan to value ratio)
Residential property investment - Loan to value ratio This acronym stands for loan to value ratio and it pretty much means just what it says! It is the proportion of a property (or a property portfolio) that you own in relation to it’s overall value. So in the case of our home worth $200,000 where we still owe $120,000 then our LVR for this property is 60%. Banks look at LVR in order to determine if you can afford a loan. As a rough guide, banks like you keep your LVR at a maximum of 80%, beyond which they want to insure themselves by getting you to pay mortgage insurance – more on that next!
Mortgage Insurance
Residential property investment - Mortgage insurance This is insurance that banks get you to pay where your LVR will be greater than 80%. Now the thing to remember here is that mortgage insurance is also referred to as ‘lenders mortgage insurance’, so it is insuring the lender against you defaulting. It doesn’t provide any sort of insurance for you and can cost a good whack of dollars, so be careful!
Negative Gearing
Residential property investment - negative gearing When an investment, such as your investment property earns you less than your outgoing costs associated with the property after all tax deducations are taken into consideration then that property is negatively geared. Negative gearing is used as an investment strategy by many high income earners as it effectively reduces their taxable income and also scores them a property that is hopefully going to grow in value. The thing to remember here is that you are losing money each month on this property which means you need to make up that shortfall from your own pocket.
Positive Gearing
Residential property investment - positive gearing The opposite of negative gearing, positive gearing is where the income from a property exceeds the expenses. This means you are making money on the property. Some people use the terms positive gearing and positive cashflow to mean the same thing, however, at we differentiate between positive gearing and positive cashflow property. Positive cashflow property returns a positive cashflow after tax deductions are taken into account, whereas positively geared property returns an income regardless of tax deductions. Making money is a great thing, but do keep in mind that you will need to pay tax on your income.
Rental Yield
Residential property investment - rental yield The rental yield is the return on investment as a percentage of the amount that you’ve invested. Gross rental yield = ((weekly rent x 52)/Property value)*100. So as an example here if your $200,000 property was getting $280 per week then the rental yield would be 7.28%.
Residential property investment - serviceability This relates to your own personal income/cashflow and is taken into account by banks, in conjunction with your LVR, in determining suitability for a loan.
Stamp Duty
Residential property investment - stamp duty This is a state government tax that is applied to the transfer of property and really is a massive cost consideration when purchasing a property. As an example, at the time of writing this, in the state of Victoria, Australia, if you were to purchase an investment property for $300,000 then you would need to pay a whopping $13,070. No getting around it though…!

So there you have it, not a complete list as we could go forever, but enough to get you started! Remember, knowledge is power, so work on increasing your property investment knowledge and it will pay off for you!