Are you new to the world of property investing?

If you’ve ever felt perplexed by the intricate jargon of the industry, fret not, as we’re here to transform that bewilderment into understanding. Picture yourself impressing your dinner companions with your newfound expertise, effortlessly discussing the ins and outs of the market.

Negative Gearing

In basic terms, negative gearing occurs when the costs of managing your property—such as loan interest, council rates, and upkeep expenses—exceed the rental income it generates. Imagine this scenario: your property brings in $25,000 in rent, but your expenses amount to $35,000. You’re left with a $10,000 deficit. However, there’s a potential tax benefit here, which is why many property investors favour negative gearing as a strategy.

Positive Gearing

As the name implies, positive gearing is the direct opposite. It occurs when your property’s income exceeds its expenses. This situation not only enhances your financial standing but also implies that you’ll probably owe taxes on this surplus income. You might also come across the term “cash-flow positive,” which is certainly appealing to any investor’s ears.

Depreciation

Depreciation refers to the gradual decrease in the value of an asset as time passes. In the context of property investment, this encompasses tangible items such as appliances, carpets, and water heaters. These assets experience a decline in value each year, as outlined in a Depreciation Schedule prepared by a Quantity Surveyor. The positive aspect? These depreciation expenses could potentially be deductible on your tax return.

Capital Gains

Capital gain refers to the growth in your property’s value compared to its initial purchase price. This increase is usually recognised when you sell the property. Nevertheless, if your property appreciates in value, you might have the opportunity to utilise the capital gain by refinancing your loan, using a new valuation as a basis.

Capital Gains Tax

When selling an investment property that has increased in value, you will be responsible for paying Capital Gains Tax (CGT). It’s essential to accurately report both gains and losses in your tax return to ensure compliance with the Australian Taxation Office (ATO) regulations, thereby maintaining a positive relationship with them.

Equity

Equity signifies the part of your property that you genuinely possess. For example, if your property is valued at $600,000 and your outstanding mortgage balance is $100,000, your equity amounts to $500,000. Equity can be a valuable asset, providing the freedom to acquire additional properties or finance home renovations.

Rental Yield

Rental yield refers to the income generated by your property from tenants, expressed as a percentage of the property’s total value. To compute the gross rental yield, multiply the weekly rent by 52 and then divide by the property’s value.

Loan-to-value ratio (LVR)

LVR, or Loan-to-Value Ratio, represents the ratio of the loan amount to the property’s value. Typically, lenders favour an LVR of 80% or lower, indicating that you’d require a 20% deposit. Failing to meet this threshold might result in the need to pay lenders’ mortgage insurance—a protection for the lender, not the borrower, and an additional potential expense.

With this guide in hand, we trust that you’re now more comfortable navigating the intricacies of property investment terminology.

Keep in mind, your local 1st Street Mortgage Broker is readily available to customise your lending approach, ensuring it harmonises seamlessly with your investment goals.
Ready to embark on your journey into the property market? Don’t hesitate to get in touch with your local 1st Street Mortgage Broker today for personalised assistance.