Property Investing Glossary

Understand the jargon with our property investing glossary... A property investing glossary for all those terms!

Dealing with real estate agents can be hard enough without all the jargon they throw at you. Then there are the lawyers and the accountant. And if you're reading this site at length, I've probably talked about a few terms you don't understand.

So I have decided to end the torture and create a glossary for you. I really hope it helps!

The Investing In Property Property Investing Glossary.

Property Investing Glossary - A

ACQUISITION COST - Cost of acquiring an asset, including stamp duty payable and any other expenses incurred by the purchaser.

ALL-IN-ONE-LOAN - Allows you to deposit all of your income into the loan account and then withdraw money from that account for day-to-day transactions. The longer the extra funds stay in the account, the bigger your saving on interest.

AMORTISATION PERIOD - The period of time over which a loan is calculated and repaid. For example, a loan can be amortised over 25 or 30 years (or less or more!)

AMORTISATION SCHEDULE - this is a month-by-month breakdown of your loan repayments at any given interest rate (so it would change if the interest rate changed). It shows you how much of your repayment in any given month of the loan is going into interest, and how much into principal. At the start of a loan, the interest component of the repayment is much higher than the principal component. This slowly reverses, month-by-month, the amounts cross over at about the halfway point, and the amount of principal becomes greater than interest until it forms the majority of the repayment amount. Your lending bank should be able to give you an amortisation schedule, or you can use a number of online calculators instead, some of which allow you to print out the schedule. A very useful tool if you want to reduce the period of your loan as well.

APPRECIATION - An increase in the value of a property due to changes in market conditions, renovations or other causes.

ASSESSED VALUE - The valuation placed on a property for the purposes of taxation by an authority.

ASSET - Something of monetary value which actually generates money for you. Not something you happen to own that has (depreciating) value, like a car or a boat. An asset can include real property or bank accounts, or businesses. A house can actually be either. If you simply own your home and pay its mortgage, even the equity you own in it is not an asset, until you harness it to make you more money. Try to bear this in mind when working out your own investment plan. The banks may tell you different - and when you're applying for a loan, it's fine to list your house, car and boat as an asset. Just remember that it's not, really at any other time unless it fills the criteria in the first sentence!

AVERAGE ANNUALISED PERCENTAGE RATE (AAPR) - Sometimes called the Compulsory Comparison Rate. THis figure takes inot account the other costs associated with a loan, and expresses them as an average interest rate to create a level field on which to compare similar loan products' interest rates.

Property Investing Glossary - B

BAD DEBT - debt accrued for items which do not make you money, cost you money and/or which depreciate over time. Examples include your everyday driving car, gadgets and doodads (qv), using a credit card to pay for food and everyday expenses, without paying it back within the interest-free period...

BASIC VARIABLE - A variable home loan at a reduced rate. This rate is reduced because the loan has fewer features than a standard variable loan.

BODY CORPORATE - An administrative body made up of all the owners within a group of apartments/units in a strata building. The owners elect a committee which handles administration and upkeep of the site.

BREAK COSTS - Incurred when a loan is paid off before the end of its term.

BRIDGING FINANCE - Enables you to cover the purchase of a new property when you are yet to sell your existing property.

BUYERS AGENT - person who acts on the behalf of a buyer when finding and negotiating for properties that a buyer wishes to purchase. May be used for personal or investment purposes.

BUYERS MARKET - When the demand for property is less than supply. Buyers may pick and choose the properties they buy because they are easier to find. As a result they gain the advantage of being able to offer lower prices as well.

Property Investing Glossary - C

CAPITAL EXPENDITURE - Just about anything you spend to improve the material value of a building, such as renovating a bathroom. The cost of a renovation such as this may be tax deductible, either as a part of your annual tax return, or as a reduction in the capital gain on the property when you sell. Always keep your receipts and consult an experienced accountant or quantity surveyor (or both) after any major renovations.

CAPITAL GAIN - The gain on the sale of a capital asset.

CGT - Capital Gains Tax. Tax you pay on a property (other than your PPOR qv.) when you sell it and realise a gain in the capital value of it. CGT runs to ??% of your capital gain in Australia, so if you bought a house for $550,000, and sold it later for $650,000, you'd have to pay CGT on the profit of $100,000. Make sure you speak to an accountant experienced in property before you go ahead and sell though, because capital expenditure (like certain renovations) on a rental property may actually be able to be deducted from the capital gain, reducing your tax burden.

CAPITAL IMPROVEMENT - any structure or addition to a property erected as a permanent improvement, adding value to the property and extending its useful life.

CAPPED LOAN - A loan where the interest rate is not allowed to exceed a set level for a period of time, but is allowed to drop.

CASH FLOW - A measure of cash inflow and outflow from a business. Positive cass flow means more money is coming into a business than is going out. Negative cash flow is the opposite.

COLLATERAL - An asset (such as a car - yes in this case, a car - or a home) which guarantees the repayment of a loan. The borrower risks losing the asset if the loan is not repaid according to the terms of the loan contract.

COMMERCIAL PROPERTY - property intended for use by all types of retail and wholesale stores, office buildings, service establishments, manufacturing plants, storage units and hotels, to name a few.

COMMON PROPERTY - Land, amenities or areas of a building within a strata title property that are shared by all owners. Eg - a common room, swimming pool, gymnasium, or driveway.

CONSOLIDATION LOAN - you may choose to refinance (qv) a loan to include other debts (such as credit cards or vehicle loans) and reduce the rate at which interest must be paid thus reducing repayments in general. Beware that the costs of refinancing to consolidate may be greater than the benefit you may get out of it.

CONTRACT OF SALE - An agreement in writing setting out the terms and conditions relating to the sale or purchase of a property. Also the purchase document signed at an auction.

CONVEYANCING - the legal process of transferring ownership of real estate.

Property Investing Glossary - D

DEFAULT - failure to meet debt payment on a due date.

DEFERRED ESTABLISHMENT FEE - is charged when you pay out your loan within a short period of taking it out, such as two years.

DEPOSIT BOND - Guarantees that the purchaser of a property will pay the full deposit by the due date.

DEPRECIATION - a decline in the value of a property due to changes in market conditions or other causes like wear and tear on buildings.

DISBURSEMENTS - Solicitor's incidental costs involved when dealing with a client on behalf of the lender, eg searches, pest reports and inspection certificates.

DOODADs - Nothing rude here. Anything you don't really need as a basic necessity of life (like shelter, clothing and food) is a Doodad. That means your car, boat, trailer, big plasma television, iPod/Phone, laptop, and anything else that is really a "want" or at least a convenience of modern life. Doodads cost you money and should never, ever be bought on credit, because they usually wind up costing you twice what they are worth that way, all the while depreciating in re-sale value to almost nothing. Make sure you always pay for doodads outright, using income generated from your assets using OPM (qv).

DUAL OCCUPANCY - A block of land which is zoned so that two distinct dwellings are permitted to be constructed.

Property Investing Glossary - E

EASEMENTS - A right, such as a right of way, afforded a person to make limited use of another's real property.

EQUITY - The amount of an asset actually owned. Equity is the difference between the market value of the property and the amount still owed on its mortgage.

Property Investing Glossary - F

FHOG (First Homeowners Grant) - Available as a government grant in Australia. The standard rate of FHOG until 2008 (and may still be after June 2009) was $7000 towards your deposit and legal costs, plus exemption from stamp duty on properties under AUD$500,000. See my article on the FHOG for more.

FIXED RATE MORTGAGE - A mortgage in which the interest rate does not change during the term of the loan.

FREEHOLD - An estate in real property which continues for an indefinite period of time.

Property Investing Glossary - G

GOOD DEBT - borrowing to invest in a way that ensures that the debt pays for itself and puts money back in your pocket, without taking money out.

GEARING - Total borrowings divided by the total tangible assets of a Trust.

Property Investing Glossary - H-I

INTEREST-ONLY LOANS - A loan where the principal is paid back at the end of the term and only interest is paid during the term. These loans are usually for a short time, typically one to five years.

INTERNAL RATE OF RETURN (IRR) - The total rateof return generated by an investment over its life or a given timescale, taking into account sale an purchase prices and all cash flows associated with the holding.

INTRODUCTORY LOAN - A loan offered at a reduced rate for an introductory period (usually no longer than 15 months and often called the "honeymoon period") to new borrowers.

INVESTMENT PROPERTY - a property that is not occupied by the owner but leased to produce income.

Property Investing Glossary - J-K

JOINT TENANCY - a form of co-ownership that gives each tenant equal shares and rights in the property, including the right of survivorship.

Property Investing Glossary - L

LEASEHOLD - An estate in real property in which the land on which a building is built is only leased from the government for a certain period of time. A total lease can be 99 years, but you may buy into that lease at year 70, for instance. This means you will only own the property on that land for 29 years unless you pay to renew the lease. Most of the city of Canberra was built on leasehold land.

LENDERS MORTGAGE INSURANCE (LMI) - This is insurance taken out by the lender - but paid for by the borrower - to cover themselves if the borrower defaults on the loan, and property sale proceeds do not cover the outstanding amount.

LIABILITY - something which takes money out of your pocket, and puts it in someone else's (particularly the bank's). Repeatedly. This is usually a credit card, car loan, homeloan on your PPOR (qv)... Really, when developing a solid financial plan for the future, you need to make sure that your assets are generating money for you, and the money they generate - preferably using OPM (qv) like cashflow from rental returns - can then be used to pay for all your liabilities. Remember: at any time other than when you are going to the bank for a loan for another investment asset, your home is a liability.

LIQUID ASSET - An asset, cash or otherwise, that can be converted into cash.

LOAN APPLICATION FEE - also called the Establishment Fee . A fee paid to a lender for processing a loan.

LOAN TO VALUE RATIO (LVR) - the ratio of the amount lent, to the value of the property. Most loans are set at 80% LVR, which means your deposit must cover 20% of the value of the property, plus taxes and other costs. Before the Credit Crunch, you could get LVR as high as 106%, allowing you to borrow the entire cost of the property, plus enough to cover costs or renovations. Even 95% LVR is difficult to find now.

LOC (LINE OF CREDIT) - some financial institutions will offer you a credit limit on your loan that you can draw down at any time. You don't have to make set repayments on the principal in the same way as you would with a credit card, so repayments can be much lower. Beware of higher interest rates and the effect of compounding.

LOW-DOC LOAN - A loan where limited documents are required to prove the applicants income.

LOWER QUARTILE - 25% of property sales for a suburb or particular area or city are recorded below this price point.

Property Investing Glossary - M

MARKET RENT - the rental rate which would apply to a property if it was leased out at the same price level as similar properties in the area. The Australian government is offering incentives to investors leasing properties out at 20% below market rent, to improve housing affordability.

MEDIAN - the middle point of prices for all houses sold in a suburb, city or state. Different from the "average" price because the average is calculated by adding all the sales together and dividing by the number of sales. The median price takes the number of sales over a given time period (eg. 50 sales in one quarter), lines them up from smallest to largest price, and takes the middle number (in this case, number 25). The price of that house is the median for that suburb during that quarter.

Property Investing Glossary - N

NEGATIVE GEARING - this is owning a property where the incomings are less than the outgoings after all tax deductions have been claimed. If your rental incomings are $1000 per month and your mortgage repayments are $1400 per month, then you would claim the $400 per month as a tax deductible loss at the end of the financial year. This is a tactic (illegal in some countries, like the USA, but not in Australia) which allows people on high incomes to reduce their taxable income. For more on Negative Gearing, see our article.

Property Investing Glossary - O

O&A (OFFER AND ACCEPTANCE) FORM - This is the form you fill out when making an offer to purchase a property (usually at the real-estate agents). If the owner accepts the offer, it then becomes a binding contract (unless you say "pending finance", "pending building & pest inspection" - in which case it is binding once you are satisfied that the property is in good order).

OFF THE PLAN - purchasing a property before it has been built, having seen only the plans. Most common for buying apartments and in large developments. Can be a risky strategy if you don't do your homework.

OPM - Other People's Money. It's what you use to gain Leverage (qv) when you are investing. If you don't have a lot of money, borrow the rest of what you need to do the job from Other People. Always do the sums though, to make sure you know know where you are going to get the money to repay it. Preferably, your investments should all be Positively Geared.

Property Investing Glossary - P

PASSED IN - refers to auctions. If the property does not reach the reserve price set by the vendor during the course of the auction, it is "passed in" and will have to be sold by negotiation, or sealed bids.

PORTFOLIO (OF PROPERTY) - The number and type of properties owned by an investor.

POSITIVE GEARING - If the income from your property (eg $1400 p/m) exceeds the repayments, taxes etc. you have to make to keep it (eg. $1000p/m), then it is positively geared. This is because it is putting extra money in your pocket each month. Note that you may be subject to income tax on this extra amount.

PPOR: Principle Place of Residence. The home you actually live in most of the time. If you own it, you get tax concessions on things like CGT (qv)

POA - "Price on Application". Most commonly seen in real estate advertisements.

PRINCIPAL AND INTEREST - the interest to be paid on a mortgage over the time of the loan, plus the amount actually borrowed to secure the property. The principal is the amount you pay to reduce what is owing on the loan.

PROPERTY CYCLE - Usually lasting between seven to ten years, a cycle in the property market includes periods of growth, slowdown, bust and upswing. Understanding where your chosen area is in the property cycle is very useful to help you choose your strategy for entering, staying or exiting the market for a particular property. Simply speaking, you should hold on to property you have in a bust, buy at the start of the upswing and hold, sell towards the end of periods of growth (of buy and sell fast on the way up, renovating to maximise profits), and sell before - or hold as - the market enters a slowdown.

Property Investing Glossary - Q

QUANTITY SURVEYOR - manages all costs relating to building, and can handle everything from initial costs to final figures. You can also hire a a Quantity Surveyor to check over renovations you have done yourself and produce a depreciation schedule (even on old items you scrapped from the property) to help you reduce your tax burden during that year.

Property Investing Glossary - R

REFINANCE - Changing the way a property is financed, usually by paying out an old loan and replacing it with another loan at a cheaper rate.

REVERSE MORTGAGE - a loan taken out (usually on a PPOR) by seniors (over 60 years of age) who are asset rich but cash poor. This allows them to access the equity in their home without having to sell it. Usually, the loan does not have to be paid out until the borrower dies, goes into a home or otherwise relocates.

RENTAL YIELDS (and calculations) - this is the return on investment shown as a percentage of the amount invested. Gross rental yield = weekly rent x 52 (weeks in a year) ÷ value of property x 100

ROI - Return On Investment

RESERVE PRICE - The minimum amount that a vendor will sell for at auction.

Property Investing Glossary - S

SEALED BIDS - when a property "goes to sealed bids", a deadline time on a particular date is set. Prospective buyers have to hand their bids to the vendor or real-estate agent in a sealed envelope and the highest bid wins, providing the vendor's reserve price is met.

SOLD UNDER THE HAMMER - a property which has gone to auction and sold at that auction without being passed in.

SERVICEABILITY - this is a calculation working out whether you can manage mortgage repayments on a property, based on income and expenses.

STAMP DUTY - tax calculated on the value of the property (usually between 3-5%), levied by the state government in Australia.

STRATA TITLE - Title granting ownership of a section or "unit" of a larger building. Also known as "Unit Title" this can be sold by the owner to someone else.

SUBDIVISION - a section of land (usually must be over 700sqm) that is divided into smaller lots.

SUPPLY AND DEMAND - this equation depends on the number of properties on the market vs the number of people looking at any one time. If there are very few properties on the market and many people looking, then it is a "Sellers' Market". If there are lots of properties on the market and not many people looking to buy, then prices will drop and it it a "Buyers' Market".

Property Investing Glossary - T

TENANTS IN COMMON - when there are two or more owners of a property, but they own unequal amounts and have unequal rights to the use of that property.

Property Investing Glossary - U

UPPER QUARTILE - 75 percent of the properties sold in a given timeframe are below this price point. So if 100 properties are sold, the price 25th from the top is the Upper Quartile Price.

Property Investing Glossary - V

VACANCY RATE - a percentage figure based on how many properties are available on the market to rent at a particular time. Healthy vacancy rates are considered to be between 2-4%. Higher than this, and there are too many properties on the market. Market rents will drop. Lower than this, and there is a short supply. When the vancancy rate sits between 0-2%, it becomes difficult for tenants to find a place to live, so the prices for rents go up drastically. This can settle out when more tenants are pushed into buying their own properties to live in, or when investors return to the market and start building more houses for people to rent from them.

VENDOR - person selling a property.

VENDOR'S TERMS - Also known as "wrapping" or "Vendor Finance". The seller of a property is willing to offer a buyer assistance in buying a property. This can take the form of rent higher than the market rent (which pays off the mortgage on the property for the buyer, and gives the vendor a little profit for their trouble).

Property Investing Glossary - W-X

WRAP - see Vendor's Terms

Property Investing Glossary - Y

YIELD - usually shown as a percentage of the amount invested, this is the return received by an investor on an investment.

Property Investing Glossary - Z

I hope that was helpful for you. There are plans to keep adding to this property investing glossary every month as I find new terms that I might have missed.

And please, if you have a term that you need help with and it's missing from this property investing glossary, contact me from the contact page. I'll be delighted to help out if I can!

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