Starting your investment journey can be overwhelming, especially when encountering unfamiliar terms. Whether you’re currently searching for your first investment property or are thinking about embarking on this quest in the near future, we want to make it easier for you. Here are some straightforward explanations of the essential terms every beginner investor should know.

Rental yield (Gross and net rental yield)

Rental yield measures the profit a property generates each year as a percentage of its value.

It’s calculated with a simple formula.

Gross rental yield: Annual rent/property value x 100

Net rental yield: (Annual rent – all expenses [mortgage, insurance, letting fees, etc.])/property value x 100

Net rental yield is generally a more accurate figure because it takes into account expenses and outgoings

Higher rental yield is generally favourable because it generates stable rental income and a steady cash flow. You can look at median rental yields across your suburb to get an idea of what to expect.

Capital growth/Capital gain

Capital growth/gain is typically the main attribute investors seek.

Capital growth is the amount your property has risen in value over time you have held it. And capital gain is the profit you can earn upon the resale of the property.

It’s worth remembering that in Australia, property investors must pay tax on their capital gains. But since Australian property has such a solid track record of skyrocketing in value, it’s still the go-to choice for investors.

Positive & Negative Gearing

Put simply, positive gearing is when the property generates more in rental income than it costs in expenses (such as fees and loan repayments).

Negative gearing is the opposite – the property makes an annual loss because the income from rent is lower than the cost of expenses.

The benefits of positive gearing are self-explanatory, but why would anyone want to negatively gear their investment property?

If the property has future growth potential, it’s a common investment strategy to use the tax deductions and benefits that come with negative gearing to make profit in the long term via capital gains.

Equity

Equity is the difference between what your home is worth and how much you owe on it.

By using your home equity as security with the bank, you can borrow against it to purchase an investment property. This avoids the need to save for a deposit – allowing you to own an investment sooner.

As the value of your investment property rises over time, you can use this equity to refinance and purchase another investment. This property will in turn rise again, allowing the investment pattern to continue.