Property investment for beginners: 11 terms you should know

In this article, we’ll explore the fundamental terms that every aspiring property investor should know, helping you to navigate the market with confidence.

Whether you are just starting or looking to refine your understanding, this guide will provide you with the essential vocabulary needed to communicate effectively and make strategic property investment choices.

Here are eleven key property investment terms to know.

1. Capital growth

This is the increase in the value of a property over time. Capital growth is a primary goal for many property investors, as it allows them to sell the property at a higher price than the purchase price.
Example - if a property is purchased for $750,000 and its value increases to $1,000,000 over four years, the capital growth is $250,000.

2. Rental yield

Definition: the annual rental income generated by a property, expressed as a percentage of its purchase price (annual rental income / purchase price) x 100.
Rental yield is a crucial measure for investors focussed on generating income from their properties.
For example, if a property purchased for $500,000 generates $25,000 in annual rent, the rental yield is 5%.

3. Positive & negative gearing

Positive gearing is when the income from a property exceeds the expenses, resulting in a profit.
Negative gearing is when the expenses of owning a property exceed the income it generates, resulting in a loss. In Australia, negative gearing can be used to offset tax liabilities.

4. Cash flow

Cash flow is the net amount of cash being transferred into and out of a property investment. Positive cash flow means the property is generating more income than expenses, while negative cash flow indicates the opposite.
E.g. if your property generates $2,500 per month in rent and your expenses (mortgage, maintenance, etc) are $2,000, your cash flow is $500 per month.

5. Equity

Equity is the difference between the current value of the property and the amount owed on the mortgage. Equity represents the ownership stake you have in your property.
E.g. if your property is valued at $600,000 and you owe $400,000 on your mortgage, your equity is $200,000.

6. Depreciation

Depreciation is the decline in value of a property’s structure and assets over time. In Australia, investors can claim depreciation as a tax deduction, which can improve the cash flow of the property.
E.g. a new property might have a depreciation schedule allowing you to claim $10,000 annually over several years.

7. Multi-rental property

Multi-rental properties are designed to be rented out to more than one party for higher investor returns. E.g. a duplex or dual income home which is two separate dwellings contained on the one block of land

Positive gearing is when the income from a property exceeds the expenses, resulting in a profit.

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8. LVR (Loan-to-Value Ratio)

This is the ratio of a loan to the value of the property being purchased, expressed as a percentage, so loan amount / property value x 100. LVR is used by lenders to assess the risk of lending money.
Example, if you borrow $400,000 to purchase a property valued at $500,000, your LVR is 80%.

9. Offset account

This is a transactional account linked to your mortgage, where the balance is offset against your mortgage principal, reducing the interest you pay.
E.g. if you have a $500,000 mortgage and $50,000 in an offset account, you only pay interest on $450,000.

10. Stamp duty

Definition: a government tax paid when purchasing property. The amount varies by state and territory in Australia and is based on the property’s purchase price.
For example, in NSW, stamp duty on a $600,000 property might be approx. $22,000.

11. Strata title

Strata title is a form of property ownership commonly used in apartment complexes and townhouses where individuals own their unit and share ownership of common areas.

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Key terms to know

Capital growth
Rental yield
Positive/negative gearing
Cash flow
Equity
Depreciation
Multi-rental properties
LVR (Loan-to-value ratio)
Offset account
Stamp duty
Strata title

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Strategy

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