Are you new to the world of property investing?
If youâve ever found yourself scratching your head at the complex lingo, weâre here to turn that confusion into clarity. Imagine dazzling your dinner guests with your newfound knowledge, effortlessly chatting about the ins and outs of the market.
Negative Gearing
In simple terms, negative gearing happens when the expenses of maintaining your propertyâthink interest repayments, council rates, and those pesky maintenance costsâoutweigh the rental income it generates. Picture this: your property rakes in $25,000 in rent, but your outgoings total $35,000. Youâre looking at a $10,000 shortfall. But hereâs 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. Itâs when your propertyâs income surpasses its expenses. Not only could this scenario boost your bank balance, but it also means youâll likely pay taxes on this income. Another term you might hear is âcash-flow positiveââmusic 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.
Capital Gains
Capital gain is the increase in your propertyâs 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, youâll be liable for Capital Gains Tax. Itâs crucial to report both gains and losses in your tax return, keeping the ATO happy.
Equity
Equity represents the portion of your property that you truly âown.â 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 propertyâs overall value. To calculate the gross rental yield, simply multiply the weekly rent by 52, then divide by the propertyâs value.
Loan-to-value ratio (LVR)
LVR, is the proportion of the loan compared to the propertyâs value. Most lenders prefer an LVR of 80% or less, meaning youâd need a 20% deposit. Falling short of this threshold could mean paying lendersâ mortgage insuranceâa safeguard for the lender, not you, and a potential extra expense.
Armed with this guide, we hope youâre feeling more at ease with the property investment jargon.
Remember, your mortgage broker is on hand to tailor your lending strategy, ensuring it aligns perfectly with your investment aspirations. Ready to dive into the property market? Reach out today for personalised support.