Property professionals can often get caught up in their own ‘lingo’. Make sure you’re in the know by getting to grips with the basics. There are some commonly used, and often misunderstood, terms that you should know if you are investing in property.
Appraisal – A report that includes an estimation of the sale price of a property. Appraisals are compiled by real estate salespeople and agents, generally at no charge. Unlike valuations, appraisals cannot be used in a court of law if there is a dispute (see ‘Valuation’).
A-REIT – Australian Real Estate Investment Trust. Formally known Listed Property Trusts. An A-REIT is an Australian listed property trust that buys property (generally commercial property) and manages it on behalf of investors. Some commonly known A-REITs include; Westfield Corporation (WFD), Colonial First State Retail Property Group (CFX), Dexus Property Group (DXS).
Capital Growth – An increase in the value of the property over time.
Capital Gains Tax (CGT) – The tax payable when a property is sold. This is based on the difference between the original purchase price and the sale price, including purchase and sale costs. Capital Gains Tax discount – A discount of 50% on the CGT payable, provided the property has been owned for at least 12 months (and provided various other conditions have been met).
Cooling-Off Period – The length of time given to a prospective buyer to consider their impending property purchase. The length of time varies between the states and territories. There is no cooling-off period when you buy at auction.
Depreciation Schedule – A list of items in an investment property that can be depreciated and claimed as a tax benefit. It includes such items as carpets, hot-water systems and air conditioning.
Equity – The difference between the value of what you owe and the value of what you own. In other words, it represents the portion of the property you own as compared to the portion that the lender owns.
Fixed Rate Loan – A loan where the interest rate is fixed for a period of time, which can vary from one to 15 years.
Gearing – The term used to describe borrowings to purchase an investment property.
Interest-Only Loan – A loan where only the interest is paid and the principal remains unpaid at the end of the loan.
Line of Credit Loan – A loan that is similar to a credit card, where you are able to withdraw funds as needed. Sometimes regular, minimum, interest-only repayments must be made.
Lender’s Mortgage Insurance (LMI) – A premium paid by the purchaser if the loan is more than 80% of the value of the property. This insurance covers the lender if the borrower defaults on the loan.
Low-Doc Loans – Loans where minimal documentation is required by the applicant. Often used by self-employed people. The interest rate charged is often higher than for a full-doc loan.
Loan-to-Value-Ratio (LVR) – The value of the loan as a percentage of the value of the property.
Median Price – A statistical measure often used to measure movements in property prices. The median price is derived by arranging property prices in ascending or descending order and then selecting the middle price. It is not the average.
Mortgage – A loan that is secured by property.
Negative Gearing – The interest payable on an investment loan is greater than the income received.
Neutral Gearing – The interest payable on an investment loan is equal to the income received.
Off The Plan – Signing a contract for property which has yet to be built. This is often the practice of developers of blocks of high rise units and apartments.
Positive Cash Flow – Income from the property (including tax benefits) is greater than all the expenses (including interest, rates and taxes, repairs, etc.).
Positive Gearing – The income from a property is greater than the interest payable on the investment loan. The difference between positive gearing and positive cash flow (and negative gearing and negative cash flow) is that cash flow includes all income and all expenses whereas gearing only refers to rental income vs interest.
Principal and Interest Loan – A loan where both interest and principal are repaid.
Rental Return – The annual rental income as a percentage of the value of the property (also called the rental yield or yield).
Risk – The potential that a property will lose money.
Self-Managed Superannuation Fund (SMSF)– A type of trust that exists with the sole purpose of funding the beneficiaries’ retirement.
Stamp Duty – A state government charge incurred when buying property.
Strata Title – Most flats, units, apartments and townhouses that have some common areas are on strata title. All the dwellings are on a separate title, but there will be some common property that is shared by all owners, such as water and sewerage pipes, driveway, stairwell and garden.
Subdivision – The act of dividing land into smaller allotments.
Vacancy Rate – The total number of vacant investment properties as a percentage of the total number of investment properties in an area.
Valuation – The definitive value of a property. It is based on recent comparable sales in the area. It is conducted by a qualified valuer for a fee. Valuations are often required when you are borrowing money, sorting out a divorce settlement or finalising a deceased estate. Valuations can be used as evidence in a court of law to help resolve a dispute.
Variable Rate Loan – A loan in which the interest rate fluctuates.
Vendor – Owner of property.
Yield – The income as a percentage of the value of the property.