Put simply, negative gearing is when the costs of owning a property – like the interest repayments, rates and maintenance costs – exceed the income you receive. Say you earn $25,000 in rental income and your expenses add up to $35,000, the property would be negatively geared to the tune of $10,000. This could potentially provide a significant tax break, which is why negative gearing is a popular strategy with property investors.
As you may have guessed, positive gearing is the opposite of negative gearing. It’s when the income you make on a property is greater than the expenses. This could provide you with an income, however it should be noted that you will most likely be required to pay tax on this income. Another term for this is ‘cash-flow positive’.
‘Depreciation’ is a term used to describe the decrease in value of an asset over time. With a property investment, it includes items like stoves, carpets and hot water heaters. Each of these items depreciates a little bit each year according to a Depreciation Schedule you have drawn up by a Quantity Surveyor, and these amounts may potentially be claimed back as a tax deduction.
A capital gain is the amount by which the property increases in value, relative to what you paid for it. A capital gain is usually realised when you sell the property. However, if your property goes up in value, you can often borrow against the capital gain (also known as accessing your equity) by asking a lender to value the property and refinance your loan.
Capital Gains Tax
Capital Gains Tax is the tax you pay when you sell an investment property that has gone up in value since you purchased it. You need to report capital gains (and losses) in your income tax return.
Equity is the proportion of the property that you own. So, if the property’s worth $600,000 and you owe the bank $100,000, you have $500,000 in equity. Equity can be used in a variety of ways, for example you can potentially borrow against it to buy additional properties or fund renovations.
The rental yield refers to the money your tenants pay you. Rental yield is calculated as a percentage of the property’s value. You can calculate the gross rental yield by multiplying the weekly rent by 52 weeks, divided by the property’s value.
LVR stands for loan-to-value ratio. Essentially, it’s the percentage of money you borrow for a loan, compared to the value of the property. Lenders generally like to keep the LVR within 80% – so you would need a 20% deposit. If you don’t have a 20% deposit, you will be subject to lenders’ mortgage insurance which protects the lender if you default on the loan. This can be expensive.
We hope you’re feeling more comfortable with the lingo now! Our role as your mortgage broker is to advise you how to structure your finance according to your property investment strategy, and find you the right investment loan for your specific financial circumstances and goals. So, if you’re thinking about making a property investment, don’t hesitate to call your Element Finance Broker in Fremantle or Joondalup!