Property investment glossary: There are a number of terms commonly used in reference to property investments you might not be familiar with.
This A to Z property investment glossary lists meanings of terms like capital gain (capital growth) and capital gains tax to help you understand the language specific to property investment market.
Property investments in residential property in Australia represents, over time, a controlled and secure, long- term asset typically providing increasing yields in a well planned investment portfolio…
An amount in your contract for things that might come up which have not been initially selected and specified in the construction contract.
Annual Percentage Rate (APR)
How much a loan will cost you over a whole year, including things like service charges, loan fees, mortgage insurance, and interest, of course.
A written report on how much a property is worth, (usually an established home, but it could be a piece of land) usually prepared by a professional valuer.
The amount your investment property goes up in value. If it goes down, that’s called “Depreciation”. (“Depreciation” is also used to describe the amount by which you tell the tax office that things have gone down in value since the day you bought them for your investment, so you can try and claim these losses against your annual tax bill. See “Depreciation” under “Tax”.)
Which way your new home faces e.g. ‘a northerly aspect’ or “westerly aspect”
The Australian Taxation Office.
A loan, usually short term, that has a series of fixed monthly payments with the remaining amount due in a larger lump sum at the end.
A variable home loan at a lower rate but with fewer features than a standard variable rate home loan.
If you develop more than one home on one piece of land, which share certain things (such as a driveway) then you almost certainly need a body corporate. It’s made up of all the owners within a group of units on a “strata title”. The owners elect a committee which handles administration and upkeep of the building and common areas. It’s also less well-known as an “owners’ corporation”.
sometimes if a loan is paid off early you may have to pay a fee or costs.
sometimes you need to bridge the gap between buying a new home (or homes) and selling one you own already, so you might take out a temporary loan to progress your investment property before “longer term” finance becomes available. Note: Bridging finance is generally more “expensive” (ie a higher interest rate) than long-term finance. And if you don’t sell your existing home in time, you can end up for longer than you expected with two finance deals costing you money at the same time, which could become un-affordable.
Capital Gain (Capital Growth)
The amount by which your investment property has gone up in value, compared to what you paid for it. For example if you bought a property for $400,000 and it’s now worth $500,000, then you’ve made a capital gain of $100,000, which is subject to tax.
Capital Gains Tax
Paid on the profit you make on the sale of your investment property, as assessed by the ATO. There are some concessional tax treatment provisions available under some circumstances, and how they may or may not apply to your personal tax situation can be explained to you by your financial advisor, or just check the ATO’s own website.
You agree with a lender that the interest rate on your mortgage will not be more than a particular value during a certain period of time, but it will go up and down below that level.
Cash Flow Positive
An investment property is called “Cash Flow Positive” when the money coming to you is more than your outgoings after tax-deductible items have been claimed from the Government. In short: you receive more rent than your mortgage repayments, and you are still ahead after taking into account items such as interest on the loan, maintenance, insurance, land tax, rates, and so on.
Cash rate/bank rate
The “Official Interest Rate” set by the Reserve Bank of Australia is the “cash rate”. The bank rate is what lenders offer you, above the cash rate, giving them a profit margin on your loan.
Certificate of Title
A document of title to land held under the ‘Torrens Title’ system. It shows who owns the land, and whether it is subject to mortgage, lease, easement or anything else which may negatively affect your interest as a buyer.
Any sum of money payable to a professional adviser who helps you obtain finance, find a property, and so on. Commissions must be declared to you.
The part of the property owned and used by all the unit/home owners in a dual occupancy development, for example, which is maintained by the Body Corporate, like a shared driveway.
Conditions of Sale
The conditions under which a purchaser takes property sold to him. When you buy a property they should be attached to the Contract of Sale, and legally it’s assumed you have paid attention to those conditions.
Conditions, Convenants, and Restrictions (CC and Rs)
The regulations that define how a property may be used and any rules the land developer makes for the benefit of all owners in a subdivision, such as property size, height, colour, façade, set back from the road, and so on.
Consumer Price Index (CPI)
How the prices of a “basket” of items which represent those regularly bought by Australian households goes up and down over time – in other words, the “cost of living” or “inflation”. If your investment property rises in value faster than the CPI, then it is said to be “doing better than the cost of living”, and the difference between the CPI and the percentage your property has increased in value is called a “real” profit.
Contract of Sale
An agreement relating to the sale of property with the terms and conditions of sale. All contracts must be in writing.
Being able to easily change your loan from a variable rate schedule to an agreed fixed rate schedule, at your request.
The process that legally transfers property ownership from one person or body to another. Often conducted by a solicitor, who may offer you other legal advice at the same time, it can also be achieved using a “Conveyancer”.
A period of time given you to legally withdraw from buying a property. It varies around the country.
A legally-binding promise where one person promises to another that something has, or will be, done. For example, someone selling you a property promises to do something to it before the sale is concluded and you move in.
“Taking security” means that whoever you’re borrowing from uses your existing property (whether you live in it, or it is an investment property) as security for a new property you purchase. This means that if you don’t keep up the payments on the new property, the financial institution may choose to sell the new one and the “secured” property to settle your debt.
A sum of money you put down to “prove” that you are serious about purchasing a property, that you wish to secure it at the price on offer, and you can arrange for the finance to allow you to buy it. If you decide not to proceed, for whatever reason, this deposit may or may not be refundable in whole or in part, but usually is not.
As buildings get older and items within it wear out, they become worth less. The ATO allows property investors to claim deductions related to the building (Capital Works), and also Plant and equipment items in it.
Not “putting all your eggs in one basket” as regards your investment risk. A smart diversified investment portfolio could include some stocks and shares, a superannuation fund, some fixed interest deposits, some form of residential property, commercial property, and precious metals.
Drawdown of funds
To withdraw funds from a loan account, as with house and land purchases with a construction loan, where building progress payments are “drawn down” on an on-going basis depending on what stage the “build” is at.
“Due on sale”
A clause in most mortgage contracts meaning you must pay off the entire outstanding balance if you sell or transfer your property.
A traditional term meaning an agreed sum a buyer pays to a seller to show that they are serious about buying, and normally not refundable if the buyer backs out.
A legal right to access and use someone else’s land. The most common easements are to give utility companies access to land to maintain their infrastructure such as pipes, cables, drains and so on.
An interest or right in property which usually reduces the value of the land but does not prevent the transfer of ownership to you. This could include such things as easements, mortgages, and caveats.
The difference between what you owe on a home and its theoretical value if you sold it. If your home is worth $400,000 on the market, but you only owe $150,000, then you have “equity” of $250,000.
Also called a “Second Hand home”: simply, a home that has been lived in previously.
Final inspection report
The local Council formally agrees that a home is complete, all monies owing to them have been paid, and the home is ready to be lived in.
Things that can be removed from a property.
Where the interest you pay on your home loan is fixed at a specific level for a specified term, usually one to five years. Note: this can work to your advantage, or against it, depending on what happens in financial markets.
Items affixed to the structures of the land, so they cannot be removed without damaging the property.
Freehold or fee simple
You can use land in any way you wish, subject only to usual zonings and other government controls.
Graduated Payment Mortgage (GPM)
A fixed-rate, fixed-schedule loan. It starts with lower payments than usual, (which might be a good way for “budget buyers” to get started), and then payments rise annually, with the entire increase being used to reduce the outstanding balance. This steady increase in payments may enable you to pay off a standard 25 or 30 year loan more quickly.
Similar to freehold except that title also includes any common property that is owned jointly, such as driveways, roads, and common areas. A “body corporate” must manage the titles, and each property will have its own certificate of title and entitlements (such as voting rights) and will contribute money to the body corporate to cover joint expenses. These may not always be equal between properties. They are most common in apartment developments, but can apply to dual occupancy and medium-density developments too.
when all work on your new home is complete, your local Council is happy everything has been completed correctly, and you have paid all monies owning to them and the builder, then you are ready to move in. The builder will take you through a “handover” where you will be shown through the house, checking that everything is to the standard you expected, and everything in the home will be shown to you and explained.
Often known as “building insurance” or “home insurance”, this offers you protection against damage caused by fire, wind, and other common hazards. Your bank or finance company may insist you have building insurance at least equal to the total amount of your mortgage. Be aware that the events covered vary from insurer to insurer – so shop around. Also note, this type of insurance does not cover your contents, which require separate contents insurance.
Income Protection Insurance >
If your salary suddenly stops, for whatever reason, this can help you maintain your lifestyle, and your property investments.
You only repay the interest charged on your mortgage, not anything off the principal or amount owing. This can be used to reduce your monthly expenditure. Note: if your home loan has a re-draw facility, the total amount you can re-draw actually reduces as you pay off your principal. So you can switch to interest only to stop you reducing the amount of principal you are paying off, thus keeping your re-draw facility higher. Subject to finance approval, mortgages can be rearranged to move between principal and interest or interest only to suit your on-going individual circumstances.
Any land or a building, (or part of a building), which you buy in order to earn rental income, enjoy a capital appreciation, or both.
A person who attempts to invest money prudently and productively over the medium or long term, trying to achieve a reasonable return and perhaps capital growth as well. People sacrificing investment safety for quicker or larger gains are called “Speculators”.
An agreement whereby two persons may own a property together – you and a friend, for example. The rule of “survivorship” applies: when a “joint tenant” dies then the surviving joint tenant automatically gains entitlement to the deceased person’s share of the property. Joint tenants own equal share of the home.
the person who owns a home that is being rented out.
Landlords Protection Insurance
As a Landlord, this protects you against things like:
Deliberate damage to yiour investment home, or theft from it, by the tenant or their guests (over and above their Rental Bond) Loss of rent if the tenant doesn’t pay you on time and in full Liability, including for a claim against you by tenant, and Legal expenses if you have to take action against a tenant.
You sign a legally binding document to allow someone else (the tenant) to live in your property in return for rent. Terms can vary from 1 day to 99 years.
The tenant who has the right to use or occupy a property under a lease.
The landlord who owns the title on a home and gives the right to occupy a property under a lease.
Level Payment Mortgage
You make identical monthly payments over the entire life of the loan. Very predictable, but not very flexible.
Life, Trauma and Permanent Disability Insurance
It is probably a smart idea to have a variety of insurance cover protecting your family in the event that you cannot maintain your property investment, for whatever reason.
LMI (Lenders Mortgage Insurance)
Sometimes required by lenders when you’re borrowing a significant percentage of a property’s value – say more than 80 per cent, for example. It provides insurance to the lender in case you stop paying your loan off unexpectedly, also known as “defaulting”.
LOC (Line of Credit)
You have a pre-set credit limit that you can draw down at any time. It’s similar to a credit card, except you don’t have to make set repayments of the principal.
A loan that doesn’t require as much documentation to set it up. They generally incur fees and charges, and a slightly higher interest rate, but are popular with self-employed people, people with inadequate financial records, or if you don’t have an established credit rating for whatever reason.
LVR (Loan-To-Value) ratio
Divide the loan amount by how much the property is worth, then multiply by 100 to get a percentage, called the Loan-To-Value ratio. Banks and financial institutions use this as a measure of whether they think you can afford the loan.
When all factors are taken into account, this is a theoretical assumption of the highest price a property could sell for in the open market.
The median house price is the middle price of all sales recorded in a particular suburb, postcode, city or state in a given period. So if there were 100 sales in a particular suburb, the median would be number 50 on the list. It’s commonly assumed that the median price is the same as the average price, but that’s not true. To calculate the average, you would add up the value of the 100 sales and divide the total by 100 and that number could be quite different to the median. Note: an unusual number of low priced sales, or high priced sales, can therefore “skew” the median price range in any given period in an area.
A licensed professional adviser who represents various lenders and helps consumers find affordable mortgages. Normally, the broker charges a fee (and/or receives a commission from the lender) only if the consumer finds a suitable loan. All such fees and commissions must be revealed to you.
A legal document establishing a loan on a property.
Mortgage Origination Fee
A fee for the work involved in preparing and servicing a mortgage application. (The amount varies and is sometimes discretionary.)
The lender who gives you the mortgage loan.
when the money coming to you is less than your outgoings after you have claimed tax-deductible items from the ATO. For example, you receive rent on a property of $1200 a month, but your mortgage repayments are $1500 a month. Your shortfall is $300 a month, which you can claim as a loss when doing your tax return. Many people use negative gearing to reduce their overall taxable income. Another way to look at this is if the total of deductable outgoings (e.g. your loan repayments, rates, and repairs), exceeds the income (the rent you receive) then the property is said to be “negatively geared”.
Off the plan (Also known as Off Market)
When you buy off the plan, you are buying a property before it is built, having only seen the plans. This term is commonly used for apartments or units under construction or about to be built.
Plant and equipment
Refers to removable items in the investment property like carpet, hot water systems, blinds, light fittings and many other items.
POA (Price On Application)
Where a seller does not wish to reveal the price they are willing to sell for unless you approach them directly and privately.
The local council gives your builder permission to perform a building process, as in:
Zoning\Use permit – Authorisation to use a property for a specific use such as a single family home.
Demolition permit – To permit demolishing an existing home or other structure.
Grading permit – To allow a change the contour of the land.
Septic permit – To build or modify a septic system.
Building permit – To build or modify a structure.
Electrical permit – A separate permit required for most electrical work.
Plumbing permit – A separate permit required for all new plumbing.
Portfolio (as in “Property Portfolio”)
The number and type of investment properties you own.
when the money coming to you is more than your interest expense (and other possible deductions). For example, the rent you receive may be $1300 a month, but the monthly repayments are only $1000. You have a positive income of $300. Depending on your overall financial situation and tax status, you may then be subject to tax on this income.
PPOR or PPR (Principal Place of Residence)
Generally, a home is considered your principal place of residence for legal purposes if you live in it (with your personal belongings) on a daily basis. Other things taken in account include how long you’ve lived there, where your family live, where your mail is delivered to, whether gas, water, phone and electricity is connected to the building, are you on the electoral roll, and so on.
Principal and interest (P&I)
The amount borrowed or still to be repaid, plus the interest still owing on the mortgage. Unless you have an Interest Only loan, the principal is always part of the monthly repayment you make. At the start of a mortgage you tend to be paying off more interest and less principle (the bank takes its interest back first). As the mortgage progresses, you pay less interest and pay off more of the principle.
Property values usually follow a cycle of growth, slowdown, reduction (sometimes called a “bust”) and then an upturn again. See also “Economic Cycle”.
A service provided (usually by a real estate office) leasing homes, collecting rents, choosing tenants, making sure properties are maintained properly, and liaising between the tenant and the landlord.
A charge for recording the transfer of a property, paid to the appropriate branch of government.
The financial institution allows you to “re-borrow” a percentage of what you have paid off your home loan, to use for whatever you wish, such as a down-payment on a new investment home.
To obtain new finance for something on different (hopefully, better) terms, usually meaning you pay off of an existing loan with a new loan. This is often a good idea when interest rates or other costs have fallen.
The return on your investment home, expressed as a percentage of what it cost you.
Gross rental yield is calculated by multiplying the weekly rent by 52 (the number of weeks in a year), then dividing by the value of the property, and then multiplying this figure by 100. For example if a property is rented for $400 per week, and the purchase price was $450,000, then the yield is $400 times 52, divided by $450,000, times 100. The yield in this case is 4.62%.
Right of Way
A person may have a right to cross your property to access his or her own property, or there may be a public pathway across the land.
RP (Registered Plan)
A numbered plan, held in the Titles Office, showing the dimensions and details of any particular piece of land. A piece of land is sometimes called a “parcel”.
RPD (Real Property Description)
A way of describing a particular parcel of land. E.g. Lot 3 on RP 546789 identifies the overall plan number, and then a specific lot number. A plan search at the Titles Office will yield a copy of the sub-divisional plan and dimensions of each lot on the plan.
A contract between a buyer and the builder which explains clearly what the purchase includes, what guarantees and quality checks there are, when the buyer can move in, what the closing costs are, and what dispute resolution process is in place if the contract is not fulfilled in any way, or if the buyer cannot get their finance in place at the agreed upon time.
Whether the bank or finance institution thinks you can manage your mortgage payments, based on your known income and expenses.
A legal term that means the moment you become entitled to move into a home you have purchased. It happens slightly differently when you’ve built a new home to when you buy an established home. You will already have “Title” to the land the home is sitting on, so settlement formally occurs when your builder, having made sure you have paid in full any money you still owe them, hands you the keys to the home, and you both sign “A Completion Of Works”. This happens at “Handover”.
An old “Imperial” unit of area measurement often still used to describe the size of homes. One “square” equals a space 10 feet x 10 feet, which in metric measurements is equivalent to 9.29 square metres.
Stamp duty (also called Transfer Duty)
A state government tax on the transfer of property calculated on the value of the property. One major advantage of building a new home is that Stamp Duty is payable on the land only, and thus is significantly less than the amount paid on buying the equivalent established home.
Standard variable home loan
A home loan usually with plenty of features, the cost of which goes up and down according to the prevailing home loan rate charged by your bank or finance institution, which usually reflects “Official Interest Rate” set from time to time by the Reserve Bank of Australia. When official interest rates go up, home loans usually become more expensive, and vice-versa.
How long the law requires a builder to warranty that the essential structure of the home is – and will remain – sound. The law varies around the country: Metricon’s structural guarantee is always 25 years.
Any piece of land which divided into smaller lots.
Supply and demand
The more properties there are on the market, the harder people will try and sell them. It’s a “buyers’ market”. When there are fewer, they tend to sell quickly, and at better prices. It’s a “sellers’ market”. Most of the time, nothing affects property values as directly, as obviously, or as consistently, as the law of supply and demand.
Tax File Number
A unique number allocated to individual taxpayers by the ATO, and used to match income and taxation details.
A document showing ownership of property. Also records details of any mortgage, encumbrance and area.
This is the name given to a system whereby title to land is proven by one document issued by a Government Department.
The usual (and simplest) form of a certificate of title to a property.
The document used to transfer the interests of a registered owner to a buyer by means of lodging it at, and it being accepted by, the titles office.
Bank account relating to monies received or held by an agent or a developer for or on behalf of another person. Monies held in trust are protected at law.
A measure of how many dwellings are available for rent in an area over a specified period. A low vacancy rate means there are not very many dwellings available for rent, (and that rental levels are likely to be higher) while a high vacancy rate means there is a plentiful supply of rental properties (and rents will probably be lower).
The person (or an entity) who is selling a home or a piece of land.
This term has two meanings. It is the process by which a sales consultant helps a customer to choose exactly the right home for their needs, and what the buyer wants included in that home, which then translates into a Sales Contract.
It is also used to describe a final inspection of a home to check for and document any problems that need to be corrected before the buyer takes possession, or after the buyer has moved in.
The total return by an investor on an investment, shown as a percentage of the amount invested. For example, any rental yield, plus any tax advantages you may gain through negative gearing, and any capital gain, less any tax owing on that gain.
Property investments in a new property offers numerous benefits over an established property, including valuable tax deductible depreciation advantages and lower transaction costs when purchasing house and land packages, apartments, town houses and real estate/property.
Property Investment Glossary