Glossary of the Terms
Understanding Your Property Investment Journey
The real estate and finance industries can be complicated – they are filled with concepts that people outside of these
industries do not use in everyday life – that is why, to help you better understand your property investment journey, we
have created a list for you of relevant concepts and their definitions.
Borrowing Capacity
is the amount that a lender is willing to loan you. Your borrowing capacity is affected by a variety of
factors, including but not limited to: your current debt level, your annual income level, your occupational history, and
the perceived risk level of the investment property you are purchasing.
Building and Pest Inspection
an analysis of a property done by a builder. Its purpose is to both check the structural
quality of the building and if there are active termites on the property. If there are major structural defects to the
building or active termites on the property, the buyer may be able to terminate the conditional contract of sale and thus
withdraw from their purchase of the property.
Buyer’s Agent
a specialist in researching and buying property.
Capital Growth
is the increase in value of an investment property over time.
Contract of Sale
a formal letter stating a buyer’s offer and/or terms to the seller. Drafted by a sales agent, it is sent to
the seller, who then either accepts or rejects the offer. If the seller rejects the offer, the buyer can either make another
offer or not. If they do not, they forgo their status as an interested buyer in that property. If the seller accepts the offer,
then the contract of sale between the seller and buyer enters the ‘conditional phase’, which is a process of negotiation
between the seller and buyer over the specific details of the sale of the property. During this process, both seller and
buyer have conditions that they would like the other to fulfill. If some or all of these conditions are fulfilled to the seller’s
and buyer’s satisfaction, the contract of sale enters the ‘unconditional phase’, which means that there are no conditions
left for the seller and buyer to fulfill, and the process of transferring the property from seller to buyer can begin.
Conveyancer
a specialist in transferring property titles from one person to another.
Formal Finance Approval
is a lender’s unconditional approval of a buyer’s loan for a property
Mortgage Broker
a specialist in finding home borrowers the most appropriate lender for their financial situation.
Equity Comes in Two Forms
total equity and usable equity.
Total Equity is the monetary difference between the bank loan and the property’s value. For example, if you have taken out a loan of $450,000 on a property valued at $500,000, your total equity is $50,000. If you were to pay down your loan by another $50,000, your total equity would be $100,000.
Usable Equity is the monetary amount you can withdraw from the total equity you have in a property. You can withdraw 80% of the total equity you have in a property and use it for financial transactions. To use our previous example, if your total equity is $50,000, you can withdraw 80% of that – which is $40,000 – and use it to buy a new car or renovate your home. Bear in mind however, that withdrawing usable equity results in your total equity in that property decreasing and your loan increasing on that property. So, withdrawing $40,000 of usable equity from a total equity of $50,000, reduces your total equity in that property to $10,000, and increases your loan from $450,000 to $490,000.
Total Equity is the monetary difference between the bank loan and the property’s value. For example, if you have taken out a loan of $450,000 on a property valued at $500,000, your total equity is $50,000. If you were to pay down your loan by another $50,000, your total equity would be $100,000.
Usable Equity is the monetary amount you can withdraw from the total equity you have in a property. You can withdraw 80% of the total equity you have in a property and use it for financial transactions. To use our previous example, if your total equity is $50,000, you can withdraw 80% of that – which is $40,000 – and use it to buy a new car or renovate your home. Bear in mind however, that withdrawing usable equity results in your total equity in that property decreasing and your loan increasing on that property. So, withdrawing $40,000 of usable equity from a total equity of $50,000, reduces your total equity in that property to $10,000, and increases your loan from $450,000 to $490,000.
Property Manager
a specialist in maintaining the operations of a rental property
Rental Yield
is an annual return-on-investment measure. It measures the amount of rental income per year that you are receiving from a property, compared to the price you paid for that property. The higher the rental yield, the higher the return you are receiving on your investment into that property. Conversely, the lower the rental yield, the lower the return you are receiving on your investment into that property.
Australia wide, the average rental yield is 5%.
Rental yield is calculated by dividing the annual rental income of the investment property by its purchase price, and then multiplying that figure by 100.
For Example:
An investment property is purchased for $500,000
It is rented out at $500 per week ($26,000 per year)
$26,000 / $500,000 = 0.052
0.052 X 100 = 5.2% Rental Yield
Australia wide, the average rental yield is 5%.
Rental yield is calculated by dividing the annual rental income of the investment property by its purchase price, and then multiplying that figure by 100.
For Example:
An investment property is purchased for $500,000
It is rented out at $500 per week ($26,000 per year)
$26,000 / $500,000 = 0.052
0.052 X 100 = 5.2% Rental Yield
Return on Investment
is the monetary amount an investor receives after their investment’s profits have been
subtracted by that investment’s costs.
Sales Agent
a specialist in selling property
Settlement
is a period after the conditional contract of sale has been completed
