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Property investment jargon explained Bank valuation A bank valuation is the bank’s estimate of the value of a property. When you apply for a home loan, your lender will send an independent valuer to appraise the property. The bank valuation is usually more conservative than the market value, because it’s designed to limit the lender’s risk and indicates the amount they can expect to recoup if the property is repossessed. It’s important to note that a bank will not accept your valuation of the property, even if you obtain your valuation from an independent valuer.
Capital gain Capital gain is the term used to describe the profit on the sale of the property, once all expenses have been deducted. Capital Gains Tax (CGT) is applicable to capital gains on investment properties purchased on or after 20
September 1985, but does not apply to your principal place of residence in most instances. The tax you pay is based on the sale price minus the cost involved in acquiring and holding the property (your cost base), and any gain is included in your assessable income in the financial year you sell the property.
Capital growth Capital growth is the increase in value of the property over time. The supply and demand in an area impact the capital growth. If there is high demand from buyers and limited supply, the prices are likely to rise.
Current market value Not to be confused with the listing price, neither the most recent offer on a property, the current market value, as defined by The International Valuation Standards Council, is: ‘The estimated amount
18 March 22, 2017 The Byron Shire Echo
for which an asset or liability should exchange on the valuation date between a willing buyer and a willing seller in an arm’s-length transaction, after proper marketing and where the parties had each acted knowledgeably, prudently and without compulsion’.
Depreciation
Russel Shaw from Acceptance Finance has produced a handy glossary in their latest newsletter.
expenses can be used to reduce your taxable income. Positive gearing is when the rent exThis is a fee charged by ceeds the costs and the proplenders to protect themselves erty pays for itself. against borrowers who default, in case the net proceeds of a Rental yield The rental yield is the anforeclosure do not cover the nual rental income, expressed loan. LMI may be applicable to as a percentage of the propborrowers who do not have a erty’s value. It’s oft en quoted deposit of 20 per cent or more. when examining a property’s Loan-to-value ratio rental potential, and may be calculated as a gross percent(LVR) The LVR is the proportion age (before expenses are subof money borrowed versus tracted), or as a net percentage the value of a property. Lend- (accounting for purchasing or ers take into account the LVR transaction costs).
Lenders mortgage insurance (LMI)
Depreciation is the decline in the value of an asset over time. As an investor, you may be able to claim depreciation on the property buildings and the items within it against your taxable income, but again you should check with your ac- when assessing mortgage apcountant to see what tax de- plications, as the lower the ductions are applicable to you. LVR, the lower their risk. Usually lenders will require you Equity to pay LMI if they’re lending Equity is the current market more than 80 per cent of the value of a property minus any value of the property. outstanding mortgage repayments. Investors can use the Negative gearing Negative gearing applies equity from the increasing value of an investment property when the property’s expenses surpass the rent earned. These to purchase a new property.
Suburb growth Suburb growth refers to the capital growth of properties within a particular suburb. As an investor, it a good idea to thoroughly research a suburb’s profile, including its capital growth potential, before purchasing a property.
number of properties vacant in an area. It is a useful way for investors to assess the rental demand of a suburb before purchasing.
Zoning
Zoning refers to government laws specifying how property can be used. Properties may be zoned for residential, industrial, business, or other purposes. It’s important to be aware of zoning, as it affects the home loan you take out, capital growth potential, Vacancy rate The vacancy rate is the plus future renovation plans.
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