10 terms you must know before buying your first investment property
As a first-time property investor, it could be challenging to wrap your head around the industry jargon that might sound alien. However, it is important to learn the industry speak in order to make wise financial decisions. To help you out, we have prepared this handy list of 10 property investment terms you are likely to come across on your investment journey:
1. Bank Valuation – A bank valuation is the bank’s estimate of the value of a property. When you apply for a home loan, your lender will send an independent valuer to appraise the property before approving your home loan. Often, the bank’s valuation of a property is lesser than its market value as the purpose of a bank valuation is to limit the lender’s risk and it represents the amount your lender can potentially recoup if the property is repossessed.
2. Bridging Loan – A bridging loan lets you ‘bridge the gap’ between buying a new home and selling an existing one by letting you borrow money ‘temporarily’ in the interim. So, if you plan to use the sale proceeds from one home to buy another, bridging finance can help you fund the new property for a short term in between the settlement dates for both the properties.
Note that bridging loans charge a higher interest rate as compared to traditional loans, and if you don’t sell your existing property in time, you could find yourself in financial trouble with two mortgages on hand (one on your current home and the bridging loan for your new home).
3. Capital Gain – Capital gain refers to the amount by which a property increases in value as compared to what you paid for it. You can calculate your capital gain (or loss) as the difference between your total sale price (including costs such as advertising and agent’s fee) and cost price (including costs such as stamp duty and repairs).
4. Capital Gains Tax – When you sell an investment property, you must pay Capital Gains Tax if the value of the property has gone up since you purchased it.
Note that whether you make a profit or loss, it is mandatory to report capital gains and losses in your income tax return.
5. Cross-collateralisation – Cross collateralisation or a cross-collateral mortgage refers to using more than one property to secure a mortgage (or more than one mortgage).
According to experts, while cross-collateralisation lets you borrow more money, it exposes your portfolio to higher risk by giving your bank greater control over your financial affairs.
6. Depreciation – Depreciation refers to the decrease in the value of a new asset over time. In Australia, property investors can claim tax deductions for decline in the value of a building’s structure and items considered fixed to it, as well as, plant and equipment assets in the property such as carpets, ovens, dishwashers, etc.
7. Negative Gearing – Negative gearing occurs when you borrow money to buy an investment property but find that the costs of owning the property (such as mortgage repayments and maintenance costs) exceed the income being generated by the property.
Fortunately, property investors in Australia can offset their losses against other assessable income in the form of tax deductions, leading to considerable tax savings.
8. Positive Gearing – Positive gearing occurs when the income generated by an investment property exceeds the cost of owning it. With a positively geared property, you have a surplus in your kitty after meeting the costs of ownership that you could use to pay down your mortgage faster.
Note that you must pay tax on any income produced by your property.
9. Rental Yield – Rental yield is the measure of money earned by your investment property as rent paid by tenants. Simply put, it is the rate of returns from your investment property and can be calculated by dividing your gross rental income with the property’s value.
10. Self-Managed Super Fund (SMSF) – SMSF or Self-Management Superannuation Fund is a trust set up with the sole purpose of providing for your retirement. Here, the members are also the trustees and personally responsible for running the fund. Through SMSF, you can not only invest in shares but also invest in property.
And that brings us to the end of the list!
Now that you are acquainted with the industry-jargon, you can go ahead with your property purchase with much more confidence. In case you still feel confused, don’t feel shy of taking help from verified mortgage brokers at HashChing to structure your investment loan correctly. Speak to an expert now.
Meanwhile, do read these five pitfalls to avoid on your investment journey.
By Vidhu Bajaj,
HashChing Content Writer