Looking at buying your first investment property and can't keep up with all the terms, abbreviations and lingo? We have developed a dummy's guide to all things property investment for first time investors.
Loan to Valuation Ratio ("LVR") - This is the loan amount as a percentage of the valuation of the property. Lenders often use this term to define how much they will lend you. Remember if you purchase a property for $500,000 on a 90% LVR and your valuation comes in at $480,000 your bank will only lend you 90% of the valuation being $432,000 not 90% of the purchase price.If you borrow above 80% LVR your lender will require you to take at Lenders Mortgage Insurance ("LMI").
Lenders Mortgage Insurance ("LMI") - Buying your first investment property? Chances are you may need to pay LMI. It is an insurance policy that protects the lender from financial loss in the event that the borrower can’t afford to keep up their loan repayments. Your lender may make it a condition of borrowing over 80% LVR that you pay for LMI. Under the terms that are included in most LMI policies, a lender can make a claim if the borrower (you) defaults on the loan, and the sale of the property doesn’t equal the value of the outstanding loan. It might seem that there is benefit to the borrower from LMI, but by reducing the risk to the lender, LMI allows them to lend larger amounts and approve more loan applications. Lenders mortgage insurance is applied directly to your loan when it applies, so it’s not technically an upfront fee.
Property Hotspot - This is a term often used by property marketers to catch your attention giving you the impression that you will make a lot of money if you buy here or alternatively miss out on a making a lot of money if you don't buy here. Once an area becomes a hotspot is if often too late. Our tip is to buy in an area with long term growth prospects not short term hotspot areas.
Equity - This is the difference between the market value or valuation of your property and your loan.
Unconditional Contract - Once you have satisfied all the conditions in you purchase contract (finance, pest, due diligence etc) you are unconditional. It is here that you are often required to pay the balance of your deposit/s.
Comparable Sale - A similar size, age and level of finish property in a similar location to your property. These are used by valuation companies to arrive at a valuation. Valuers will often look at comparable sales in the past 6 months.
House and Land - If you purchase a house that has not been built yet chances are you have purchased a house and land with a land contract and build contract. With house and land you are required to settle the land first before you start construction. You will be required to make progress draws during the construction to the builder. Keep in mind you will commence paying interest on you loan once you settle the land.
Duplex - A type of dual occupancy dwelling which can be strata titled on completion. The two dwellings can share a common wall (attached) or be stand alone (detached). Each dwelling has separate services, kitchen, bathroom/s and parking.
Dual Living - A type of dual occupancy dwelling which comprises of two dwellings that cannot be strata titled on completion. There are two separate external entrances and can be rented out to separate third party tenants. Each dwelling has separate services, kitchen and bathroom/s. This includes properties with granny flats.
Off The Plan ("OTP") - A property that you purchase that has not been built yet. This is often the case with units and townhouses that have not started construction. Developers are often required to reach a certain level of pre-sales before their lender will allow them to commence. Your contract will have a sunset clause in it that requires the development to built by a certain date otherwise you can choose not to proceed and receive your full deposit back. Keep in mind that the market may be very different to what it is today by the time you are required to settle you property.
Townhouse - A low rise development comprising multiple dwellings that are strata titled on completion. Townhouses are often one to two levels and have their own backyard with shared common facilities such as a swimming pool or BBQ area.
Property Cycle - The market value of properties move in cycles depending on supply and demand. In Australia the property cycle can vary State by State and region by region and also by property type. Property cycles generally move in an upwards cycle with the current trough higher than the previous trough. If the current trough is below the previous trough then it is defined as a correction. Property cycles last 7-10 years in capital city locations.
Capital Growth - The increased value in a property over time, usually measured over a 12 month period. When doing your research on an area property economist measure capital growth in an area based on the median dwelling price as an indication. Be aware that not all dwellings increase in value at the same rate as the median dwelling price. Your total property return will be a combination of the capital growth (increase in value) and rental income less expenses.
Gross Yield - The total rental income for your property expressed as a percentage of the purchase price. Gross rental yields for investment properties generally range between 4.0-6.0%. The general rule is the higher the rental yield, the lower the capital growth. As a yard stick a property with a gross yield over 5.0% is cashflow positive after tax at current interest rates of 4.5%. The net yield of a property is the rental income less property expenses expressed as a percentage of the purchase price.
Positive Cashflow Property - A property that provides a positive cashflow after deducting interest and property expenses (rates, rental management, body corporate, insurance etc) from your rental income. Some properties are positive cashflow prior to receiving a tax credit back on any accounting loss called positive cashflow pre-tax. Other properties are positive cashflow after-tax. The result is the same, the property provides positive income in your bank account each year.
Vacancy Rate - Indicates the percentage of investment properties that are vacant in an area. A good way to work this out is to search how many dwellings are for rent in an area on realestate.com.au and divide this into the number of rental properties in the area. ABS statistics publishes the number of dwellings in any area and the percentage that are rental properties. A vacancy rate of 3.0% is in equilibrium. If it is higher than this then there are more properties for rent than renters and can indicate rents dropping over time. Look for lower vacancy areas to get a tenant earlier and good rental growth over time.
Commenti