When a young Aussie decides to invest in property for the first time, it can be quite daunting. Because of all the potential pitfalls and unforseen problems that can arise within the property market, it’s crucial that young investors make informed decisions from the beginning.
Throw into the mix confusing terminology and phrases, Australia’s property market can be a minefield, with some experienced individuals taking advantage of first-time investors. In order to be savvy, these young investors need to be educated on what to watch and listen out for.
Looking back on the way I built my own property empire, there are ten important phrases and terminologies that all young investors must understand before jumping into the market:
Negative gearing is when an investor has taken out a loan to purchase a property with the intention for the gross income generated by the investment to be less than the cost of owning and managing the investment.
Essentially, the loan repayments the investor is making on the loan are more than the income on the property, meaning they are losing money. The benefit of negative gearing comes from the capital growth of the property.
Rental yield is a measure of how much cash an income generating asset produces each year as a percentage of that asset’s value.
For real estate, it is the rental income as a percentage of the property’s value.
Capital growth is the increase in value of your property over the medium to long term and should be considered alongside the property’s yield. This strategy usually works well in areas that are in demand, although this also means the prices of property can be higher.
These negatively geared properties are purchased with the intention to sell them after a significant increase in market value.
Depreciation is not a word you want to hear if it is one used to describe your property; it means that the monetary value of your property has decreased over a period of time.
This can be due to numerous factors, such as wear and tear, often beyond the owner’s control.
Positive Cash Flow
Positive cash flow sounds great, and it is! It’s the receipt of more cash than was paid out, therefore, the property makes more money than it costs to hold it.
However, as with most things in life, with the positive comes the opposite; negative cash flow results from paying out more cash than you receive.
Capital Gains Tax
A term that is never celebrated, but unfortunately always necessary, is capital gains tax. It refers to the tax incurred on the profit from the sale of a property. So don’t celebrate your profits too quickly!
If you plan to be a long-term property investor, hearing the word “equity” will be music to your ears. It’s the value of ownership built up in an investment that represents the current market value of the property, minus any remaining mortgage payments.
This value increases over time as the property owner pays off the mortgage and the market value of the property appreciates.
Yes, the dreaded pest! These small, pale, soft-bodied insects live in large colonies within several different natural environments, such as wood, and can be extremely destructive to any property, so make sure they are taken care of!
Conveyancing can be tied in with refinancing, in the sense that one must prepare documents for the transfer of owners on a property.
It generally lies in the hands of a legal representative, so they can take care of the hard work!
Refinancing is very common with existing property owners looking to invest in another property. It’s the act of paying off an existing loan with the proceeds from a new loan, usually of the same size, and using the same property as collateral.
In order to decide whether this is worthwhile, the savings in interest must outweigh the fees associated with refinancing.