If you’re new to property investing it can be hard to get your head around all of the complex lingo that banks effortlessly mention. At Proactive finance Group, we’re here to turn that confusion into clarity and will help keep things simple for you throughout the entire process. Here’s a few common terms to get started on:
Negative Gearing
In simple terms, negative gearing happens when the expenses of maintaining your property—think interest repayments, council rates, and those pesky maintenance costs—outweigh the rental income it generates.
Picture this: your property brings in $25,000 in rent, but your outgoings total $35,000. You’re looking at a $10,000 shortfall. This is called negative gearing. But here’s the silver lining: this could unlock a tax advantage, which is why negative gearing is a popular strategy with property investors.
Positive Gearing
As the name suggests, positive gearing is the exact opposite. It’s when your property’s income surpasses its expenses. Not only could this scenario boost your bank balance, but it also means you’ll likely pay taxes on this income. Another term you might hear is ‘cash-flow positive’—music to the ears of any investor.
Depreciation
Depreciation refers to the gradual reduction in the value of an asset over time. In the realm of property investment, this includes tangible items like appliances, carpets, and water heaters. These assets lose a bit of their value annually, based on a Depreciation Schedule compiled by a Quantity Surveyor. The good news? These depreciation costs might be deductible on your taxes, as well as the fee you could pay for a Quantity Surveyor.
Capital Gains
Capital gain is the increase in your property’s value over what you initially paid. This gain is typically realised upon selling the property. However, should your property appreciate in value, you could potentially leverage the capital gain by refinancing your loan, based on a new valuation.
Capital Gains Tax
When you sell an investment property that has appreciated in value, you’ll be liable for Capital Gains Tax (CGT). It’s crucial to report both gains and losses in your tax return, keeping the Australian Taxation Office (ATO) happy.
Equity
Equity represents the portion of your property that you truly ‘own’. For instance, if your property is valued at $600,000 and your remaining mortgage balance is $100,000, your equity stands at $500,000. Equity can be a powerful tool, offering the flexibility to secure further properties or fund home improvements.
Rental Yield
Rental yield is essentially the income your property generates from tenants, expressed as a percentage of the property’s overall value. To calculate the gross rental yield, simply multiply the weekly rent by 52, then divide by the property’s value.
Loan-to-value ratio (LVR)
LVR, is the proportion of the loan compared to the property’s value. Most lenders prefer an LVR of 80% or less, meaning you’d need a 20% deposit. Falling short of this threshold could mean paying lenders’ mortgage insurance (also known as LMI)—a safeguard for the lender, not you, and a potential extra expense.
Armed with this guide, we hope you’re feeling more at ease with property investment jargon that may arise in your purchasing journey.
We are your Bendigo mortgage broker who is on hand to tailor your lending strategy, ensuring it aligns perfectly with your investment aspirations. If you’re ready to look into the property market reach out today for personalised support.
Call 03 4418 3444 or book directly with our online booking system.
