Let’s be real: Getting into the big ol’ world of property investing can be tough. There’s so many things to know, a bunch of random terms you’ve never even heard – and SO much information out there that doesn’t make any sense.
Everyone’s talking about “rental yields” and “negative gearing” like it’s the simplest thing in the world, and you’re out here just trying to figure out what you need to know to get you in the game.
Well, don’t you worry, because we’re here to break down all the terms that can be helpful to know when you’re just starting out – in a way that’ll take the overwhelm away from trying to learn something new.
This way, you’ll be able to read articles, talk to the experts and ask questions – all while actually understanding what’s going on.
The biggest key to property investing is having the confidence to just get started. So let’s work on your knowledge so you can start building some serious wealth and smash your financial goals.
THE BASICS
Capital Growth
What it means: How much the value of your property increases over time
Why it’s important: Capital growth is how you build long-term wealth. The longer you wait (so long as you’ve bought quality property in a good location), the higher your capital growth is likely to be.
Cash flow
What it means: The money coming in from rental income vs your expenses (loan repayments, property maintenance etc.)
Why it’s important: Positive cash flow (bringing IN more money than you’re spending on the property) means the property is essentially able to pay off itself.
Rental Yield
What it means: How much rental income your property makes, in comparison to what it cost you to actually buy it. This is usually shown as a percentage figure.
Why it’s important: Rental yield helps you to understand how well your property is doing in terms of cash flow.
Equity
What it means: The difference between your property’s current value and how much you still owe on it.
Why it’s important: Once you’ve built up your equity you can use it to buy your next investment and grow your portfolio.
Deposit
What it means: The upfront amount you pay to purchase the property (usually 10-20% of the purchase price.)
Why it’s important: Your financial situation will dictate how much of a deposit you will pay, but generally a bigger deposit means better loan terms, lower interest and avoiding extra costs. (If a smaller deposit is how you get your foot in the door though, that’s totally ok, it just may mean you have to pay Lender’s Mortgage Insurance – which we’ll get to)
FINANCIAL TERMS
Pre-approval
What it means: Where a lender tells you how much they’d be willing to lend you based on your financial situation.
Why it’s important: This helps you to understand your budget, the type of property you can afford and puts you in a position to seize opportunities when they come up – especially in a competitive market with lots of buyers.
Negative vs positive gearing
Negative gearing: When the amount you owe on your property is higher than the rental income you’re making from it – so you’re technically making a loss (but this isn’t always a bad thing because you can claim the loss on tax.)
Positive gearing: When the amount you owe on your property is lower than the rental income you’re making from it – meaning you’re making a profit from your property.
Which is better: This is all dependent on your individual goals, but often investors try to aim for a property that gives you growth in the long term and cash-flow to support you in the short-term.
Stamp duty
What it means: A government tax on your property, which is calculated based on the purchase price and location.
Why it’s important: It can add some unexpected costs (often thousands) to what you’re paying upfront – so it’s always good to consider this when budgeting your savings.
What it means: The cost of borrowing money from the bank
Why it’s important: Higher rates mean higher repayments, whereas lower rates mean lower repayments, better affordability and often more competition within the market. The rise and fall of interest rates impact both your repayments and market trends.
Lenders Mortgage Insurance
What it means: LMI is one-off insurance premium, usually paid by someone purchasing a property with a deposit that is less than 20% of the property value. It serves to protect the lender if you can’t repay your home loan and the property sells for less than what you owe.
Why it’s important: While you pay for it, LMI protects the bank, not you. However, it’s crucial because it allows many Australians to enter the property market sooner by enabling lenders to approve loans with smaller deposits that would otherwise be considered too risky. Without LMI, getting a home loan with a low deposit would be much harder, or even impossible.
UNDERSTANDING THE MARKET
Off-market property
What it means: A property that’s being sold without being advertised to the public
Why it’s important: These types of properties often have less competition to buy, and can lead to better deals. You can find these through working with experts with network connections like buyers agents, investor circles (or us!).
High-growth area
What it means: A suburb or area where the data shows that property values are likely to increase over time.
Why it’s important: Buying in a high-growth area can boost your capital gains, giving you more equity to use for future investments – helping you grow your portfolio.
Supply: The amount of homes available in the market
Demand: The number of people actively looking to buy or rent those homes
How they work together: When demand is high but supply is low, there’s often more competition in the market which means house prices go up. On the flip side though, if there’s a ton of supply and not much demand, prices tend to go down. It’s something to keep a close eye on because it can have a HUGE impact on the market.
Vacancy rate
What it means: The percentage of rental properties in a particular area that are empty.
Why it’s important: A lower vacancy rate usually means there’s a much stronger demand for rentals, which can lead to better stability in keeping your property occupied with tenants, and the ability to charge higher rent.
PROPERTY UPGRADES
Value-add
What it means: Making improvements to your property, often through renovations or upgrades to increase its value.
Why it’s important: It’s a great way to boost your equity faster and maximise the returns on your property.
Dual occupancy
What it means: Two separate homes on one block – think one piece of land with a house and a granny flat or a duplex.
Why it’s important: There’s potential to earn multiple rental incomes from one property or piece of land. This can be a great way to maximise your investment.
Subdivision
What it means: Dividing one piece of land into two (or even more) separate blocks.
Why it’s important: It can give you a bunch of different development opportunities by maximising the use of the land, and can seriously increase the value of your investment when done right!
STRATEGIC INVESTING
Portfolio
What it means: The collection of properties you own as an investor
Why it’s important: This is how you build long-term wealth. Building up your properties, diversifying and managing them well (with a good mix of long-term value growth and cash flow). A solid, strategic portfolio is the path to financial freedom my friends!
Leveraging
What it means: Using the equity of one property to help you purchase another.
Why it’s important: This is how you grow your portfolio faster, because it means you don’t need to save a deposit from scratch every time you want to make a new investment.
Diversification
What it means: Essentially, you’re diversifying your portfolio – so you’re spreading your investments across a range of locations and property types.
Why it’s important: It helps to reduce risk because it means if something happens in one market, it won’t impact your entire portfolio.
Now, keep in mind – you don’t need to know EVERYTHING to get your foot in the door. The most important part of getting started is exactly that – just getting started. But, the more you know the more confident you will feel, and the more confident you are the better decisions you’ll make.
Here at InvestHER we’re committed to helping you along your investment journey – whether you’re just getting started or you’ve been at it for a while. If you’ve got questions, want clarity on any other investing lingo or want some 1:1 support with your portfolio – we’re here for you!
Reach out here and let’s chat about how we can work together!