Getting your head around the ins and outs of property investment isn’t easy, especially with all those head-scratching terms you hear in the business. But never fear! Here’s a list in “plain English” to help you find your way around all this jargon.
A positive cash flow is one in which the rent you receive from your tenant is more than the property’s ongoing expenses such as mortgage repayments, maintenance, insurance, council rates and more. Property investors use different ways and means to calculate cash flow, often based on their particular goals. But either way, aim to buy a property which generates a positive, not negative, cash flow.
Capital Gains and Capital Gains Tax (CGT)
This is the difference between what you paid for the property and how much it’s now worth. A property bought for $500,000 and now worth $700,000 denotes a capital gain of $200,000. Bear in mind however, that if you make such a profit on your investment property when selling it, you will need to pay capital gains tax (CGT) on this amount as part of your income tax return.
Negative and positive gearing
A controversial term, negative gearing occurs when a property investment doesn’t make enough money to cover loan repayments, even after you’ve claimed all possible tax deductions. On the plus side however, negative gearing can result in property investors’ tax bills plunging significantly – in the short term at least. Sound confusing? It can be.
Investors stuck in a negative gearing situation can deduct such losses from their taxable income, thereby reducing this income and paying less tax overall. They may then sell their property at a high price with this profit covering the costs of their earlier losses.
On the other side of the coin, positive gearing indicates that the income you enjoy from your investment is more than its expense needs. Therefore, no deductions from your taxable income can be made and all that great income will be taxed.
High is great when it comes to your rental yield. A high yield essentially means you’ve made an enviable profit on your property investment with the yield measured as a percentage of the home’s overall value. A gross rental yield is the full amount of annual rent you receive plus the property’s value while a net yield is this same amount minus all your property expenses.
Low vacancy rates equal virtual victory for property investors. It means there are very few rentals up for grabs in the marketplace, leaving potential tenants scrambling to find a great home, instead of being jaded by the overflow. It also indicates how popular a particular area or suburb may be.
If you’re unsure about any of these terms or how investing can work for you, make sure you seek the professional advice of your accountant, tax advisor or real estate professional.