Important terms in Investment Properties

Important terms in Investment Properties

Wish to understand the meaning of investment property-related jargon Read along.

Equity
In investment property, equity is the difference between your mortgage and your property’s value. It is the difference between the value of your home and how much you owe on it. For instance, if your home is worth $450,000 and you owe $100,000, you have equity of $300,000.

Equity can be used as security with the banks. This means that you can borrow against your equity to fund your next investment property or other major purchase.

Median Price
The median price is NOT the average price! The median price is the sale price of the middle home in a list of homes of that area after the outliers (the few unusually high or low sale prices) are removed.

The median price better indicates a property’s value and the local real estate market. Real estate professionals refer to the median price rather than the average price because it is less affected by outliers – by eliminating the most expensive and lowest priced properties that change the perceived values in a particular housing area. A house that sells for far more or far less than most houses in the area will skew an average price.

The median price is helpful to a buyer since it allows him a more accurate and better-educated decision regarding the time and place to buy a property.

The rising median prices indicate the seller’s market, whereas the falling median prices indicate a buyer’s market.

Cash flow positive
A cash flow positive property refers to one that makes money after all the expenses are paid. Even if the property doesn’t increase in value, the money it generates can help you pay your debts or purchase more properties.

Simply put, you have a cash flow positive investment if your earnings are more than your outgoings. Even after considering the interest on the loan, maintenance, insurance, land tax, rates, mortgage repayments, etc., you’re still ahead.

Depreciation
Depreciation refers to a property’s decrease in value over time. It is essential for rental property owners because they use depreciation to deduct the purchase price and improvement costs from their tax returns. Depreciation begins when the property is used or is made available to use as a rental. In addition, depreciation can only be applied to buildings since land is not something that depreciates.

Positively Geared
Positively geared means profitable. This means that the income from the asset exceeds its outgoings and other possible deductions. It is essentially an investment that generates more income than it costs in other expenses like loan repayments and strata fees.

Negatively Geared
This happens when the income is less than the outgoings or expenses. A property is negatively geared when the rental return is less than the interest repayments and other property-related expenses. However, there is a key benefit to negative gearing. Any net rental loss incurred during the financial year may be offset against your other income, such as your salary. This allows you to reduce your taxable income.

Investment Portfolio
A real estate portfolio is a collection or compilation of different investment assets that a person holds and manages to achieve a financial goal. It includes the number and type of investment properties owned by a person or a group of people. It can also be seen as a strategic catalogue of current and past real estate deals, including rental properties and real estate investment trusts that earn monetary returns.

Rental yield
Rental yield is the amount of money you make on an investment property by measuring the gap between your overall costs and your income from renting out your property:
It can be calculated by multiplying the weekly rent by 52 (weeks in a year).
Divide the purchase price of the property.
Multiply this figure by 100 to get the percentage.

Property cycle
The value of properties usually follows a cycle of growth, a slowdown, a bust, and an upturn. This frequency typically re-occurs every seven to ten years. This four-phase wave pattern through which the housing markets move includes recovery, expansion, hyper supply, and recession, is the property cycle. The property cycle can help you predict upcoming trends and make informed decisions about your investments.

Speak with your investment property specialist at Mirren Investment Properties. We can help you understand the best options for your current finance situation and objectives.