Increase your investment IQ
Heads-up property investors, current or considering it. Have you ever read an article about property investment and had to grab a dictionary or ask Siri to make heads or tails of it?
Like a lot of industries, Real Estate has its own language and knowing the difference between a lessee and lessor can turn making money from property into a far less intimidating venture.
We have defined all those pesky property investment terms that you might come across when renting out your property because the language can be tricky to understand whether you’re starting out as an investor or getting ready to sell a property. And negative gearing – that must be evil, right? The media keep saying it’s ruining the housing market. But what is it exactly?
Study up on this list of investment lingo and you’ll be top of the class in no time!
Investment lingo for those in the know.
A property appraisal is developed by an agent, taking into consideration not only the property’s condition, location, similar properties on the market and the demand for them, but also the owner’s needs. It includes an accurate estimate of the property’s selling price.
Body corporate is kind of like a board of directors of a company. It’s a group of people (known as the Executive Committee) who are responsible for managing the common areas of a unit complex (usually owners and investors). Strata title allows for individual ownership of a piece of property (known as a lot) and shared ownership of the entire premises that encompass the lots, e.g. a single apartment in a complex.
A capital gain is the increase in the value of a property over time through market appreciation rather than additional capital investment in the property.
Comparative market analysis
Comparative market analysis is a review of the market, including current competition and recent transactions. This will be provided to someone considering selling or leasing a property, so they can make decisions about value expectations. Real estate agents perform this analysis for their clients, and in some cases, it may also be valuable for a prospective buyer.
Depreciation refers to loss or reduced value of an asset over time and is often claimable as a tax deduction by an investor due to the need to replace fixtures and fittings over time. Depreciation schedules are generally available from the Tax Office and vary based on what is being depreciated. Newer buildings may also qualify for depreciation or capital allowance. Quantity surveyors and accountants are often engaged to ensure this is managed effectively and accurately.
Equity refers to the amount or value of your property, less the outstanding amount of a mortgage. Let’s say the market value of your property is $500,000 and the balance of your mortgage is $300,000. The difference between the two is $200,000 – this is your equity. It’s possible to borrow against the equity you already have in a property for either another property or other uses depending on your lender’s guidelines.
A lessee may want to renew their lease at the end of its term e.g. after one year. Terms can be renegotiated at the time of renewal. Both the lessee and lessor should read the fine print at lease renewal time.
The period of time someone is leasing a property for, e.g. one or two years. This term will be stated in an official lease contract.
A lessee is the person who rents or leases, land or property from the person leasing it (a lessor). The lessee is also known as the ‘tenant’.
A person who rents out or leases a property. They are commonly known as the owner or landlord.
Maintenance of a property is usually the responsibility of the owner and may include minor or major repairs, upkeep of the exterior, etc., whilst changing light bulbs falls under the responsibility of the tenant. A body corporate will usually have a maintenance plan for a common area.
Mortgage Brokers are licensed to act as a go-between and find a suitable mortgage for a home buyer/investor. They will often present you with several lending institutes and can provide advice as to which best suits your circumstance.
As an investor, if your rental income is below the running costs and mortgage repayments for a property, it is ‘negatively geared’. You can generally claim this difference as a tax deduction.
A formal review of the rate of rent paid and conditions of rental agreement. A rent review is usually held every year or two.
This equation refers to the rental return on a property, less any costs associated with it. It’s usually written as a percentage of the property value or purchase price.
A tenant is the person or group of people renting or leasing a property and living in it.
Vacancy rate refers to the number of vacant properties compared to the supply. Independent Property Management, for example, currently manages 3509 rentals, of which 18 are currently untenanted (or vacant), resulting in a current vacancy rate of 0.51%.
A valuation is an estimate conducted by a licensed valuer, taking into consideration the property’s condition, location, similar properties on the market and other factors such as zoning, future development potential and market demand.
A vendor is the party who puts a property on the market for sale. This could be a private owner/investor or a company.
So there you have it! The dictionary of investment terms, the concise Independent edition. Real Estate Scrabble, anyone?