Property Investment Glossary

Appreciation

– The increase in a property’s value, which can be determined by such factors as inflation, renovations, or increasing interest in the property’s location.

Buyers Market

– A situation where supply is greater than demand, forcing the market value average to remain low and thus giving buyers the upper hand over sellers.

Capital Gains Tax

– The tax applied to the profit made from the sale of a property, also known as capital gain. The capital gain is the difference between what it cost you to buy the property and what you sell it for.

Compound Interest

– Interest paid on the original amount of money invested (or the amount borrowed or is still owning on a loan), as well as the accumulated interest on money borrowed or invested. This creates a situation known colloquially as ‘interest on interest’.

Depreciation

– A decrease in the value of a property over time, due to wear and tear.

Equity

– The difference between how much a property is worth on the market and the debt (usually a mortgage) the owner has against it. For example, a home-owner has equity in that part of the value of his or her house above the amount borrowed from a lender.

Fixed Interest Rate

– An interest rate that remains unchanged for a set period, for example, for the whole term of the loan, or for part of the term.

Gearing (Leverage)

– The level of debt related to equity that is usually expressed as a ratio.

Positive Gearing

– Gearing relates to the relationship between the costs and gains of a property. Therefore, positive gearing is when the amount of money being invested in a property (which includes debt being paid) is less than that of the money being made off it (for example, rent being paid by tenants).

Negative Gearing

– Gearing describes the costs vs. gains of a property; so negative gearing refers to a situation in which the amount being spent on a property (e.g. debt repayments, renovation costs) exceeds the amount being made on it. Negative gearing isn’t necessarily a bad thing as long as there’s the expectation that one day a positive gearing will be achieved, like when renovations are complete, for example.

Interest Only Loan

– During the lifespan of the loan, the borrower only repays interest on the principal. After the set time is over, they are then expected to pay the principal of the loan as a lump payment.

Investment Property

– A property that is purchased with the purpose of earning some sort of capital return. This can include improving the property to sell it later at a higher market value than originally purchased, or renting out the property to third party tenants.

Management Agreement

– The official written contract that acts as an agreement between the owner and manager of a piece of real estate, and outlines the responsibilities and liabilities of both parties.

Market Value

– A value that, taking into account the economic state of the real estate market, estimates the amount that an owner should be able to sell their property for.

Median House Price

– The median house price is the midway point of all the properties sold at market price over a set period (monthly, yearly etc).

Outgoings

– The expenses incurred in generating income. In real estate, these expenses include, but are not necessarily limited to, loan repayments, council rates and tax, water rates, body corporate fees, insurance, repairs and maintenance, tax on rental income and property management fees.

Property Management

– Third party management of a property on behalf of an owner to preserve the value of the income while generating income. Property management duties can include collecting rent from tenants, finding tenants to rent or lease a space, liaising with tenants, and organising necessary maintenance and repairs to the property.

Reverse Management

– A type of home loan that allows you to borrow money using the equity in your home as security. The borrower is not required to pay any money on the mortgage owed, until the property is sold or the borrower dies, in which case the equity (profit made from the sale) is paid to the lender.

Seller’s Market

– When property demand is higher than supply, market value is usually high and the seller has an advantage in setting their preferred price. This leads to potential buyers who are willing to pay more that the listed sale price.

Speculator

– Someone who purchases property (or another kind of asset) in the hopes of later selling it at a greater market value to make a profit.

Tenancy Agreement

– The written or oral agreement between a tenant and the owner of a property, which outlines the rights and responsibilities of both parties of which a property is let.

Unimproved Value

– Usually used when referring to land, the unimproved value is the value of the land (usually for rates and taxation purposes) disregarding the value of the buildings or other development or improvements. It is the intrinsic value of land at its purest state – i.e. without taking into consideration any development that has occurred to the land, including the building of property and roads, electricity and water connections.

Valuation

– In property terms, the valuation is the estimated worth of the property and is usually carried out by professional valuers. It is the process of calculating and arriving at an estimation of value for a property, and takes into consideration such factors as current demand, location, property and land size, and lots more.

Yield

– The yield is the income return on a property investment and is talked about as a measurement of future income. It is generally calculated as a percentage, based on the investment’s cost of market value, dividing income on a property (from rental payments) by the cost of the property (including ongoing running costs).