Are you new to the world of property investing?
If youβve ever found yourself scratching your head at the complex lingo, weβre 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 propertyβthink interest repayments, council rates, and those pesky maintenance costsβoutweigh the rental income it generates. Picture this: your property rakes in $25,000 in rent, but your outgoings total $35,000. Youβre looking at a $10,000 shortfall. But hereβs 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. Itβs when your propertyβs income surpasses its expenses. Not only could this scenario boost your bank balance, but it also means youβll likely pay taxes on this income. Another term you might hear is βcash-flow positiveββmusic 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 propertyβs 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, youβll be liable for Capital Gains Tax. Itβs 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 βown.β 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 propertyβs overall value. To calculate the gross rental yield, simply multiply the weekly rent by 52, then divide by the propertyβs value.
Loan-to-value ratio (LVR)
LVR, is the proportion of the loan compared to the propertyβs value. Most lenders prefer an LVR of 80% or less, meaning youβd need a 20% deposit. Falling short of this threshold could mean paying lendersβ mortgage insuranceβa safeguard for the lender, not you, and a potential extra expense.
Armed with this guide, we hope youβre 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.