Jargon Busting Property Investment Terms
Welcome to the world of property investment! It can be a daunting place for the uninitiated, with a language of its own. The good news is that you don't have to speak the lingo to understand what it's all about. In this blog post, we'll be breaking down some of the key terms associated with property investment, so you can get a better understanding of the market and what it takes to become a successful investor. We'll be looking at everything from capital growth to depreciation, and from gearing to capital gains tax. So, if you're ready to learn the ins and outs of property investment, read on!
What Does 'Capital Growth' Mean?
Capital growth, also known as capital appreciation, is an important concept for property investors to understand and consider when making decisions about their investments.
Put simply, capital growth is the increase in the value of a property over time. This increase in value is often the result of market conditions, inflation, improvements to the property, and other factors.
Capital growth can be an important factor in determining the profitability of a property investment. Investors should consider the potential for capital growth when considering a purchase, as the value of the property may increase over time, resulting in a higher return on their investment.
It is important to note that capital growth is not guaranteed, and the rate of capital growth can vary significantly from one property to the next. It is important to research the local market and consider the potential for capital growth when making a decision about a particular property.
It is also important to note that capital growth is not the only factor to consider when investing in property. Other factors to consider include rental income, tax benefits, and the cost of maintenance.
When it comes to capital growth, investors should be aware that the rate of growth can vary significantly, so it is important to research the local market, consider the potential for capital growth, and assess the risks associated with investing in a particular property.
What is an 'Equity Loan'?
An equity loan is a type of loan that enables you to borrow against the equity of an investment property. The loan amount is typically up to 80% of the property's value minus any existing mortgages.
Equity loans are generally used to purchase investment properties, although they can also be used to refinance existing mortgages or consolidate existing debts. They are usually taken out over a short-term period of five to seven years.
When taking out an equity loan, there are two main considerations to keep in mind:
1. Repayment: Equity loans are often interest-only loans, which means that you will only need to repay the interest on the loan, not the principal. This can make it more difficult to build equity in the investment property, as you won't be reducing the loan balance. It's important to make sure that you have a plan to pay off the loan in full before the end of the loan term.
2. Risk: Equity loans can be risky, as they are secured against your investment property. If the market value of the property decreases, you may owe more than the property is worth. This could mean having to pay back the entire loan amount in one lump sum.
Before taking out an equity loan, it's important to weigh up the potential benefits and risks. Consider whether you have a plan to pay off the loan within the agreed term and whether the additional risk is worth taking. It's also important to seek professional advice from a qualified mortgage broker or financial adviser before taking out an equity loan.
How is 'Negative Gearing' Used?
Negative gearing is a term used to describe a situation where an investor borrows money to purchase an investment property, and the costs of owning the property exceed the income generated from it. The investor then claims the difference between the costs and income as a tax deduction.
Negative gearing is a popular investment strategy in Australia, used by many property investors to reduce their overall tax burden. By borrowing money to purchase a property that produces an income, investors can reduce the amount of income tax they pay.
At its core, negative gearing is a way of leveraging a property asset to generate a tax benefit. This can be a great way for investors to increase their wealth without having to part with much of their own money. However, investors should also be aware of the risks involved with negative gearing, as it can also leave you with a large tax bill if the property does not perform as expected.
When considering negative gearing as an investment strategy, it is important for investors to do their research. They should understand how much of their income they can claim as a tax deduction, and what the potential returns on their investment could be. Investors should also consider the potential risks associated with negative gearing, such as the possibility of having to pay a large amount of tax if the property does not perform as expected. Additionally, investors should also consider their own long-term financial goals to ensure that they are making sound financial decisions.
In essence, negative gearing is a way of leveraging a property asset to get a tax benefit. However, it is important for investors to do their research and understand the potential risks before diving in. This will help them make sound financial decisions and ensure that they are able to both reduce their tax burden and achieve their financial goals.
What is the Difference Between 'Yield' and 'Return'?
Yield and return are two terms often used in the property investment space, and it is important to understand the difference between them.
Yield is the annual return on your investment, expressed as a percentage of the total value of the investment. It is calculated by dividing the annual rental income by the current market value of the property. A higher yield means a higher return on your investment.
Return, on the other hand, is the total amount of money you make from your investment over a certain time period. It is typically calculated by taking the initial investment plus the total income generated from the investment, and subtracting any expenses incurred.
When considering an investment, it is important to consider both yield and return. Yield is a good indicator of how much rental income you can expect to receive from the investment, while return is a good indicator of the total return you can expect over the term of the investment.
When assessing yield and return, it is important to consider the impact of taxes and other costs on your investment. Make sure that you understand the tax implications of any property investment, and factor these into your calculations. Additionally, it is important to consider the costs associated with the maintenance and upkeep of the property – these costs should also be factored into your calculations.
Ultimately, yield and return are important metrics to consider when thinking about any property investment. As a property investor, you should ensure that you understand the difference between yield and return, and consider both when making an investment decision.
We understand you and we want to help
As a professional and reliable Australian mortgage broker, Ello Lending is here to help you understand the jargon of property investment terms so you can make the best decision for your financial future. We understand the complexities of the mortgage market and are here to answer any questions you may have. So, if you are interested in investing in property, don't hesitate to contact us today and we'll be more than happy to provide you with the necessary information and guidance.
