Five terms every property investor should know
Owning an investment property is a little like having your own business. The aim of the game is for the property to generate regular income, and increase in value over the long term, while there will be a few necessary expenses that need to be managed along the way.
With that in mind, here are five terms every property investor should know…
The vacancy rate is the percentage of properties currently available for rent (i.e. empty) in an area. It can be measured on a national basis, across states or in specific regions, but it speaks to supply and demand for rental housing.
A low vacancy rate (below three per cent) means the market is tight and rental properties are in demand. It can often be a pre-cursor to rents in that region rising.
A high vacancy rate indicates there is less competition for rental properties in that area, and can be an indicator rental prices are dormant or about to reduce.
Outgoings are any expense incurred as part of the ownership of an investment property.
They extend from ad-hoc expenses like repairs and maintenance to ongoing expenses such as rates, body corporate fees, mortgage repayments, insurance, and letting costs.
It’s important every property investor is aware of all these outgoings and factors them in when purchasing a property, because ultimately, they impact the bottom line or your investment.
Rental yield measures the profit a property generates each year as a percentage of its value, and it’s a good figure to keep in mind because high rental yield indicates higher cashflow.
Rental yield is either measured as a gross or net figure (net is considered more accurate because it accounts for all those outgoings mentioned earlier), and the figures are calculated in the following ways:
Gross rental yield: Annual rent/property value x 100
Net rental yield: [Annual rent – all expenses (mortgage, insurance, letting fees etc)]/property value x 100
Although there is no hard and fast rule about what makes a good rental yield, investors tend to aim for about 5 per cent, and the higher the percentage means the higher the cashflow.
So, a high rental yield in the vicinity of 8 per cent might mean a property is undervalued and you generate good weekly income from it in relation to its cost.
If you’re looking to understand the potential rental yield of a property or suburb, tools like Property Value or realestate.com.au can assist.
For some people the aim of the game isn’t to generate a profit in the short term from their investment property at all, but rather to mitigate their tax liability by writing off property expenses like interest payments, repairs and maintenance, and rates.
This is where ‘gearing’ comes into play, with a property either positively or negatively geared.
Positive gearing is when the property generates positive cashflow – aka it effectively pays for itself with a profit from the rent.
Negative gearing is when the property makes an annual loss – as in the income from rent is less than the cost of interest payments and legitimate expenses.
This ‘loss’ can then potentially be offset against other income you earn, such as a salary, and reduce the amount of tax that you are required to pay each year.
While gearing, rental yield and outgoings are all annual factors to focus on, the real attribute most people seek in an investment property is capital gain.
Capital gain is the amount a property increases in value over the time that you own it.
For example, Jack and Jill might have bought an investment property in Noosa in 2010 for $680,000, and in 2020 it might be worth $980,000. So over a decade they enjoyed $300,000 worth of capital gain.
It’s worth bearing in mind any capital gain is taxed by the government, but Australian property has a solid track record of increasing in value, so this capital gain is one of the major reasons people seek to invest in bricks and mortar.
Looking for an investment property?
If you’re looking to buy an investment property or seeking to rent the one you own, why not chat with one of our friendly Eview Group Proud Members and find out exactly how they can help you to understand the options available.