Investing 101: The Real Estate Dictionary
Half of the difficulty for new investors and property owners comes down to understanding the complex and unusual terminology around real estate and investing. There are so many intricate parts of property and although most are simple concepts, they have new terms that take some getting used to.
So get familiar with the lingo now, so when you set out to make your first transaction you can talk the talk and walk the walk.
Appreciation: increase in value.
Capital gain: the amount by which your property has increased relative to what you paid for it. So if you purchased something for $300,000 and it is now worth $350,000 you have made a capital gain of $50,000.
Cash flow positive: you have a cash flow positive investment if the incomings are more than your outgoings after tax-deductible items have been claimed. You receive more rent than your mortgage repayments, and there is still a gap after taking into account items such as repairs, loan interest, maintenance, rates and so forth.
Capital Gains Tax: the tax you pay when you sell an investment property, if you’ve made a profit.
Conveyancing: the legal process to transfer property ownership from one entity to another.
Depreciation: the decrease in value of an item over time.
Duplex: a residential building divided into two seperate dwellings.
Equity: the difference between what you owe on your mortgage and the property’s value. If your home is worth $300,000 and you owe $150,000, then you have equity of $150,000.
Fixed rates: where a home loan is secured in at a specific interest rate for a specified term, usually one to five years.
Interest-only: only repaying the interest charged on your mortgage, not paying anything off the principal or amount owing.
Loan to Value Ratio: the loan for a property relative to its value. For example, if I borrow $300,000 to purchase a property and the property is worth $350,000 the loan to value ratio is around 85%.
Median Sale Price: the middle price of all sales recorded in a specific area. Remember, this is not the average but it is considered a much more accurate market representation than the average.
Negatively geared: this is where the incomings are less than your outgoings after all tax deductions have been claimed. You can then claim this loss on your tax return. This is a common strategy for high income investors who use it to reduce their taxable income.
Portfolio: the number of properties you have invested in.
Positively geared: when the investment income exceeds your investment expenses including maintenance, tax, interest and so forth. You are taxed on this income however it is a way of generating additional cash flow.
Principal and interest: the amount borrowed or still to be repaid, plus the interest on the mortgage. The principal is the actual mortgage without interest factored.
Stamp duty: a state government tax on the transfer of property calculated on the value of the property. The stamp duty of a property varies based on a number of factors.
Subdivision: a parcel of land divided into individual lots.
Vacancy rates: how many dwellings are available for rent over a specified time period generates the vacancy rate.
Yield: the return generated on an investment shows as a percentage of the amount invested.