Whether you’re a beginner investor or leveling up your portfolio, a solid grasp of these five terms can boost your confidence when it comes to making that big purchase.
Investing in a property for the first time can be overwhelming due to the amount of information available.
While investors need to consider the location, rental yield, and tax benefits when looking for a home to buy, homebuyers have a very different set of considerations. The main concern for investors is the long-term financial return on their investment, rather than the colour of their bedrooms.
So if you are buying your first investment or growing your property portfolio, getting your head around these five terms can help you to make a more informed decision.
In general, property investors are interested in capital growth. Put simply, a value increase over time. For instance, overall market conditions, buyer trends, and local development and improvements, such as public transit upgrades or retail stores, can influence the price of real estate.
Using a tool like Property Market Research can be useful if you’re interested in suburb reports. A quick look at the median price of a suburb can give you a sense of whether it is growing in prices.
Rental yield and demand
When you rent out a property, you make a rental yield based on all the costs you spend as an owner. A higher rental yield will make your investment more profitable in this case. In the end, there is little point in investing in a house or unit if the financial return is poor, or if you can’t rent out your home or get the price you want when you decide to sell later.
You should consider gross and net rental yields when talking about rental yield.
As a percentage, gross rental yield is equal to the anticipated annual rent divvied by the property value.
For example, an investment property worth $500,000 with expected rental income of $500 per week ($500 x 52 = $26,000) gives you the gross rental yield of:
$26,000 / $500,000 = 0.052 x 100 = 5.2%
There are several factors that go into determining net rental yields, such as council rates, strata charges, property management fees, vacancy costs, repairs, and depreciation.
Investment properties can provide a negative gearing benefit. This occurs when the expenses associated with owning an investment property are greater than the rental income it generates. This occurs due to expenses such as interest repayments, maintenance costs, strata fees, and council rates.
Losses, however, can be used to reduce your total taxable income as a tax break.
Positive gearing is the opposite of negative gearing, which occurs when rental income exceeds costs of ownership.
These calculations can be complicated! Make sure you consult your banker, or financial adviser to see how and if you could use this to your advantage.
In a housing context, equity refers to the value of the asset you own (the home) and are able to leverage when securing your next loan. Although you can build up a deposit with savings, you can also use the equity in your existing property portfolio to act as security.
For investors who already own property, you could access up to 80 percent of your property’s current market value, minus the amount you still have to pay on your loan (known as your ‘usable equity’) to buy your next property. To get an idea of what that might be, you can contact our in-house Mortgage Brokers to assist you.
If you’re looking to buy an investment property as your first home and you aren’t able to use equity, consider saving 20 percent of your prospective property’s value in order to avoid paying lenders mortgage insurance.
Costs and considerations specific to investors/landlords
A property might have a solid rental yield and is in an in-demand area but there are other costs that may impact the profitability of your investment. If you’re renting out your property, landlords must also consider the property management fees, repair and maintenance fees, strata levies, and rates that may come with a property.
So whether you’re a first-time investor or you’re looking to grow your portfolio, make sure you do your research and explore your options to make the right investment decision for your situation.