Five real estate terms you must know before investing :
If you’re a first-time property investor, you may find it overwhelming to wade through all the investment jargon. Here are five common terms you’ll regularly hear from other investors and need to understand before investing in real estate.
- Rental yield
If you’re planning to invest in property, you must know how to calculate rental yield to get a good return on your investment. Rental yield refers to the annual income generated from rent, expressed as a percentage of the property’s value. It is determined by several factors, including the location and type of the property, as well as the market dynamics.
You can calculate the gross rental yield by dividing your annual rental income by the value of the property, and multiplying that figure by 100. However, a more useful figure is the net yield of the property that also factors in your expenses, giving you a better understanding of the net return on your investment.
Some common investment property expenses include:
- Insurance
- Maintenance
- Vacancy costs
- Agent costs
- Marketing fee
- Strata fee
- Mortgage repayments
- Stamp duty
To calculate your net rental yield, subtract your annual expenses from the annual rental income. Divide this figure by the total property cost and multiply the result by 100 to get the net rental yield of the property.
Suppose that you buy a property for $800,000, and the weekly rental you expect is $400 (amounting to $20,800 annually). Your annual expense for the property comes to about $3,000. In this case, you will calculate the net rental yield as follows:
Net rental yield = [(Annual rental income – annual expenses) / total property cost]100
Net rental yield = [(20,800 – 3000) / 800,000] x 100]
Net rental yield = 2.23%
You may want to look for properties with a gross yield of 5.5 or above to ensure adequate cash flow.
- Negative gearing
Negative gearing is a common benefit associated with investment properties. Negative gearing happens when the cost of owning an investment property (including the expenses we listed in the previous section) exceeds the rental income. While this may sound counter-productive, you can benefit from the loss by using it to reduce your taxable income from other sources.
The opposite of negative gearing is positive gearing. A property is positively geared when its rental income exceeds the cost of owning it. A positively geared property is likely to give you a good rental yield. However, some investors prefer negatively geared properties to offset their short-term losses while seeking long-term gains.
- Depreciation
If you own a rental property, you can claim depreciation as an expense to reduce your taxable income. Depreciation tax deductions fall into two categories – capital works, and plant and equipment deductions.
Capital works refer to the tax deductions you can claim for wear and tear of the building’s structure and fixed assets to the property. On the other hand, plant and equipment deductions can be claimed for the wear and tear of assets that can be easily removed from the property, such as solar panels.
The Australian Tax Office (ATO) provides a comprehensive list of rental expenses you can claim over several years, including capital works and depreciating assets. As the calculations for depreciation deductions can get complicated, it usually helps to hire a quantity surveyor to assess your property and prepare a formal depreciation schedule to get an estimate of your tax deductions.
- Rentvesting
Rentvesting is becoming a popular buying strategy for those who cannot afford a house in the area they want to live in. For instance, a house in your favourite suburb may cost you around $900,000, but you can only afford a property worth $700,000.
In such a situation, you may choose to renvest, which refers to renting in your desired location and purchasing an investment property in a more affordable area. The rental return on this property should ideally cover its mortgage repayments.
- Equity
In real estate terms, equity refers to the value of your share in a property. If the market value of your house is $800,000 and there’s an outstanding mortgage of $300,000 on it, your equity will be the difference between the two, which is $500,000 in this case.
If you already own a house, it’s possible to dip into the equity you’ve built over the years to finance the purchase of your next property. In the above example, you can refinance the mortgage on your existing property to access up to 80% of its current market value and use the surplus as a deposit to purchase another property.
Speak to us to find a competitive interest rate for refinancing your existing mortgage and take advantage of the low interest rates on offer while also freeing up some of the equity in your house. If you’re looking for an investment loan, we can guide you and keep you from hitting the serviceability wall as your property portfolio grows.
