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Terminology


Positive gearing

Positive gearing is where you borrow money to invest and the income from the investment (for example, rent dividends) is more than the cost of the investment (interest and other expenses).

If youʹre positively geared, youʹll have extra money coming in. But youʹll also have to pay tax on this income at tax time.

Negative gearing

When the earnings from an investment property is less than the costs associated with the investment, then itʹs called as a negative gearing. The shortfall can be used to reduce tax liability in Australia as per current taxation laws.

Capital growth

Capital growth, or capital appreciation, is an increase in the value of an asset investment over time. Capital growth is measured by the difference between the current value market value, of an asset investment and its purchase price the value of the asset investment at the time it was acquired.

Vacancy rate

 The vacancy rate is a measure of how many rental properties in a location market are currently without a tenant. Two important figures are needed to determine the vacancy rate:

  1. The number of rental properties in the location
  2. The number of these properties that are vacant

It is recorded as a percentage.

If there are 100 rental properties in a suburb location and 10 of them are vacant, the vacancy rate would be:  

                  (10/100) x 100 = 10%

Rental yield

Rental yield for real estate is the rental income as a percentage of the property’s value. 

There are two kinds of yields,

  1. gross yield

The gross yield is most often quoted and is easily calculated. For example, if the rent charged to live in a property is $500 per week and the value of the property is $500,000 then the gross yield will be

 $500 x 52 weeks ÷ 500000 x 100 = 5.2%.

  1. net yield.

The net yield important but not nearly as easy to calculate hence not often mentioned, basic net yield calculation shown below

Basic net yield calculation 

Rent

$500/ week

$26000/Year

Vacancy rate

2%

$520 (i.e. 2% of $26000)

Insurance

 

$1500/Year

Average repair and maintenance per week

 

$500/Year

Property Management fees

6.6%

$1681.68 (i.e. 26000-520) x 6.6

Net income

 

$21798.32/Year

Property value

 

$500000

 

 

 

Net Yield

 

4.35 %

i.e. ($ 21789.32/$ 500000) x 100

Median price

The median house price is essentially the sale price of the middle home in a list of sales where the sales are arranged in order from lowest to highest price So in a list of 11 sales, it would be the sale price of house number 6, which has 5 lower priced sales below it and 5 higher priced sales above it.

This is different to the average, which would be the total value of all the house sales, divided by the number of homes sold. Technically speaking, the median is more accurate than the average because it is less affected by a few unusually high low sale prices.

Median prices in property are based on the homes that have recently transacted and are most often divided into units and houses.

Supply and demand

Demand means how many properties (may be with the same criteria) are desired by buyers.

Supply is how much the market can offer that refers to the amount of demand.

Equity

Equity is the difference between the market value of your home and the amount you owe the lender who holds the mortgage. In better words, it’s the amount of money youʹd receive after paying off the mortgage if you were to sell the home. 

Hereʹs a simplified example: The fair market value of your home is $300,000 and you owe $200,000 on the mortgage. Your equity is, therefore, $100,000 assuming you sell the property for fair market value

Passive and Active/Earned income

Passive income is any income made without active, ongoing participation. i.e. itʹs income you can earn without having to physically trade your time for money like you would with an active /earned income that you make through a job.