PROPERTY INVESTING GLOSSARY

Your active income is the money you get paid because you physically work for it. Your wage or salary is active income.

A buyer’s agent is someone who can help you find an ideal property to purchase. You tell them what you’re looking for, and they conduct research, give advice and can act on your behalf during the purchase process. If you’re time poor, looking to buy interstate or lack real estate knowledge, they can be a great asset.

Money you pay to the government when you profit off the sale of an asset, like a property. How much you pay is based on how much money you made from the sale.

Capital growth in a property refers to the increase in the value of the asset (property) over time. It is one of two income sources – the other is cash flow.

A property’s cash flow is the amount of left over in a given period, after collecting all income and paying all operating expenses. If you can maintain a positive cash flow, it means the rent covers the cost of the property and you don’t have out of pocket cash outlays. Cash flow is one of two income sources from property – the other is capital growth.

Compound growth is what you’re looking for in a long-term investment. It is the average rate of growth of an investment over a multi-year period (often several decades). And if things go to plan, the growth rate gradually increases as the investment base also increases over time.
Here's an example:
● You make an initial investment of $100,000 with a return of 10% per annum. Your return after the first year would be $10,000
● In year two your base would have grown to be $110,000. A 10% return would now be $11,000 (or 11% of your initial investment)
● Fast forward to year 10 and your asset base would be $235,795. A 10% return would be $23,579, or 23.58% based on your initial investment.

This is legally binding paperwork that says a property is agreed to be bought and sold for a specific price. It also includes other conditions of the sale, like the settlement period aka when the full purchase amount is due, and the keys exchange hands!

Any money you owe, such as a mortgage, credit card balance, or car loan.

When you’re building wealth, it’s important to avoid ‘bad’ debt which is used to purchase assets that won’t gain in value (such as a car, which will depreciate, or going on holiday), or will cost you interest and add to your expenses (such as credit cards).

In property, a deposit in an initial part of the sale price you pay to secure the building or land you want to buy.

Although the value of your property will most likely go up over time (that’s capital growth), certain aspects (such as the oven, blinds, paintwork) will age through use. And the good news is, if it’s your investment property you can claim that ‘wear and tear’ as a tax deduction.
You need a qualified accountant or quantity surveyor to prepare a depreciation schedule – which effectively lets you reduce the amount of income tax you will pay, or get a refund.

Diversification means building a portfolio across different markets and products – not putting all your eggs in one basket, so to speak. You might want to diversify your investments by having some assets in property, some in shares – and having different products within those markets. This can help protect your investments, and provide a buffer if there’s a market downturn.

Equity is the difference between the current value of your home and how much you owe on it. For example, if your home is worth $1,000,000 and you still owe $720,000, your equity is $280,000. (Nice job, hypothetical you! You could use that equity to buy something else!)

An Equity Top Up ensures that 100% of purchase price is transferred to the seller on settlement. If you’ve paid a 5% deposit but your lender has given a Loan to Value (LVR) of 80%, you’ll need to make an Equity Top Up of 15% to complete the purchase.

When the contract of sale documents are signed by both seller and buyer. This is a legally binding agreement to buy or sell a property.

A step up from the first time investor, this is someone that is more astute and wants to put more time and money into building an investment portfolio. You’ll usually have invested in two or more properties, in different locations with specific goals around gains, returns and timelines.

Someone who is looking to buy their first home, and hasn’t purchased a property before.

If you’ve bought and live in your first home but want to buy another one to rent out, you’d be considered a first time investor. If you want to start building a property portfolio to pay off your home quicker and build assets for a more healthy retirement – this could be you!

Debt that can help you purchase assets or make investments that help you accumulate wealth. For example, a mortgage that helps you buy an investment property can be considered good debt. Debt that is tax deductable (such as the interest payments on an investment property) is also considered good debt.

When federal and/or state governments offer benefits that encourage you to invest in the property market. These include the First Home Buyers Grant, stamp duty exemptions, or shorter term initiatives like the HomeBuilder Scheme.

A guarantor is a person that can help you secure a loan to purchase a property by providing additional security. It gives your lender more confidence. It’s usually a close relative like a parent, and they’ll offer their own home equity to top up your cash deposit. They also agree to be responsible for payments, if you can’t meet them.

Also known as property tax, this is money you pay for owning a property. It can cover services like council rates, water rates and land tax.

Money you pay to the government based on what you earn from working. Your tax rate varies based on how much you earn during the financial year.

In terms of borrowing, the interest rate is a fee charged on top of a loan for its use. It’s expressed as a percentage. For example, your lender will charge you interest on your mortgage as a fee for borrowing the money. If you have a higher interest rate, you’ll effectively pay more over the length of your loan.
You can also earn interest when you keep your money in a savings account or term deposit at a financial institution like a bank. A high interest rate is a good thing in this scenario!

A separate bank account you use to cover the costs of buying and managing income properties. These funds often come via drawing down on equity you have in your home or other savings.

As a property investor, you buy property to rent out for a financial return. You can also invest in other assets like shares – things that require an initial financial outlay with the hope of a future upside.

The Loan-to-Value Ratio (LVR) is the amount you're borrowing, represented as a percentage of the value of the property you're buying. The bigger your deposit, the lower the LVR will be. Lenders use this ratio to assess your credit risk.

Somebody who owns a property and rents it out to somebody else.

Lenders' Mortgage Insurance, or LMI, is insurance that protects the lender. It’s usually a one-off payment made by the borrower at the time of loan settlement, if you borrow more than 80% of your home’s value. So, if you have less than a 20% deposit, you’ll need to factor in LMI to your total purchase price. Your broker can help you figure out how much it’s going to be.

In the property world, leverage means borrowing money to increase potential return. Rather than coming up with the cash needed to invest in property after property, investors can use the equity generated by the rising value of one of their existing investments as leverage to buy a new one.

Paying back what you owe to a lender who has let you borrow money. This will include the interest charged on the loan and generally is based on a schedule you both agree to.

Broader, often nationwide or global, factors that can impact the value of your property and other investments. These are things you have no control over like natural disasters or pandemics, government policies, climate change and more. These are broken down into two types – demand factors (such as population growth, infrastructure investment and employment and education improvements) and supply factors (the rate of new property available).

Factors that directly impact your property’s value, including its location, design and amenities. These are things you can typically control.

A mortgage broker is a person who can help you secure a loan. It’s their job to understand your financial circumstances, limitations and goals and then find a lender that’s suitable for you. They’ll help you figure out what you can afford and get you pre-approval so you can start that all important property search. You will want one who’s obsessed with details and asks a lot of questions – so they find you the best deal that’s tailored to you, your life and your potential purchase.

This is when the money you earn from an investment property is less than the cost of owning, maintaining and managing it. You can deduct the difference from your taxable income.

These are the two types of properties you can purchase:
● New (also known as ‘off the plan’) is yet to be built or recently completed
● Established is a completed property that someone else has lived in for 6 months or more.

You’re an owner occupier if you bought a property and you’re going to live in it.

If you own an apartment, you’ll have to deal with these. They’re a regularly scheduled (usually quarterly) fee that covers the maintenance of common areas of properties. It covers things like insurance, landscaping, cleaning, maintenance and repairs. They may also be called strata fees.

Passive income is money you earn without physically working for it. Think property rental returns, share dividends, term deposits or a pension. Most people want to have a reliable passive income by the time they reach retirement age, if not before!

This is a collection of investments, including properties you’ve bought and other assets including shares and alternative investments.

The place where you live – where you keep all of your things and where you have your mail delivered.

A person or agency that a property owner chooses to oversee the day-to-day maintenance and operation of their rental property. Your tenants would communicate with them, not you!

Tax you pay to the government when you buy something – for example, stamp duty you pay when you buy property.

This is the person you’ll meet on your journey as a purchaser. They are the licensed representative of the seller and the person they’ve trusted to sell their property. They’ll market the property and eventually negotiate a sale – if all goes to plan!

The amount of money you make on an investment property based on the difference between the costs of buying and maintaining the property and how much is charged for rent. It is generally calculated by:
One year’s worth of rent ÷ value of the property x 100 = X.X%
The higher the percentage, the higher the yield and more money you make as an owner.

If you love where you live but can’t afford to buy there, there is another way onto the property ladder. Rentvestors rent where they want to live, and buy a property somewhere they can afford to rent it out. You can still benefit from future capital growth in your investment property, and the rent payments you receive can help pay off the mortgage (and even your own rent).

Every month, your employer pays superannuation into your choice of fund – that’s your savings for retirement. Some people prefer to manage their super investments themselves, rather than letting a super fund invest on their behalf. With the help of a qualified adviser, you can set up a Self-Managed Super Fund (SMSF) – and if you have enough money in your SMSF you can use it to buy an investment property.

This is the process of handing over ownership of the property from the seller to the buyer. On the settlement date, you pay the seller whatever’s left of the sale price (typically funded by your mortgage). The good news is your solicitors will sort this out with the buyer’s side, handling all the paperwork.
It’s important to make sure your finance is approved before the settlement date, so there’s no delays or risk of penalty fees.

You’ll need to engage a solicitor or conveyancer when buying or selling a property. It’s their job to handle all the legal aspects of the sale so the property is rightfully and legally transferred from one party to another.

Stamp Duty is a tax you have to pay to your state government when purchasing property. It varies from state to state, and is calculated as a percentage of the purchase price. Some buyers (such as First Home Buyers) pay only a little or no stamp duty at all, so look into government schemes and incentives to see if you’re eligible!

See owners corporation fees.

A tax accountant is an expert in the world of tax. It’s their job to manage tax statements and returns, and they can provide advice on financial and tax matters. They keep up to date on the latest regulations, laws and acts of our taxation system and can help you get the most of your tax returns, based on your income and assets.

Somebody who rents a property.

The person, group, trust or other entity who is selling something. If you’re selling a house or apartment, you’re the vendor.